Thursday, December 27, 2012

U.S. Industrial Renaissance Grapples with Looming Exports of Cheap Natural Gas

Natural gas is a new king of the hill, according to a newly released ExxonMobil’s 2013 Energy Outlook. Natural gas would displace coal as the world’s second biggest energy source after crude oil, claims the report. One of the key conclusions of the ExxonMobil report is that “North America will change to a net energy exporter from an importer by 2025.” It predicts that over “half of the growth in unconventional gas supplies will take place in North America, providing a foundation for strong U.S. economic growth with solid contributions from the energy, chemical, steel, and manufacturing industries.”

The latter points, however, appear to be a matter of debate. To a degree, industrial growth is in a collision course with America’s ambitious natural gas export plans. Gas prices hovering at around $3 per million metric British thermal units in the U.S. for many months and energy companies switching to more profitable crude oil production from shale formations, exporting natural gas seems like a sensible policy, pushed forth by the energy industry and some government officials. While it will take years before gas exports will become a reality, given the time required to secure licenses and high costs of liquefied natural gas (LNG) infrastructure, there is also a concern that exports could be a setback for the U.S.

Namely, the manufacturing and industrial sectors see greater difficulty to grow in the U.S. if natural gas exports materialize and push domestic prices up. The revolution of the shale gas industry has revitalized domestic industrial sector and brought back manufacturing from abroad to the U.S. Manufacturing costs are much cheaper in the U.S. due to low-cost natural gas compared to even places such as China, the world’s leading manufacturing workshop.

Major industrial firms began taking advantage of low energy costs in the U.S. and creating jobs. For example, “steelmaker Severstal recently expanded its Mississippi and Michigan plants, and Airbus unveiled plans for a giant, new factory in Alabama.” Dow Chemical, among other major chemical companies, “which is investing $4 billion to build three new chemical plants in Texas and restart a fourth in Louisiana, compiled a list of 102 projects across a range of industries worth a total of some $80 billion that are being started in response to the availability and low price of domestically produced natural gas.” Investment in manufacturing is attractive to even some energy companies, such as Shell Oil, which is mulling over construction of a large petrochemical complex in shale gas-rich Pennsylvania to produce ethylene, a feedstock for plastics, from ethane.

These and other companies are now concerned that exports of natural gas will increase the prices, which have enabled the U.S. industrial renaissance, and threaten billions of dollars worth investments in capital. According to Dow Chemical’s vice president of climate change and energy, George Biltz, “if a single cubic foot of natural gas is exported, it gives the United States a one-time jolt. But if you take that same cubic foot and you roll it through manufacturing, whether it's steel or chemicals or pulp and paper or rubber, this has as much as a 20x impact when you roll it through the whole GDP of the country.” A recent study by NERA Economic Consulting for Department of Energy argues that exports will not bring sharp increases in gas prices; on the contrary, “export revenue would generally help most Americans. The NERA report admits that “natural gas prices could jump by over a dollar per thousand cubic feet, or more than 25 percent, over five years if there are significantly more exports,” which would still be much lower than just four years ago. It is to be seen whether the U.S. Department of Energy will manage to ensure that continued issuance of export licenses would not to drive up gas prices high enough to carry negative consequences on manufacturing and industrial production.

Friday, November 30, 2012

Some Caveats on IEA’s Ambitious Forecasts

The International Energy Agency (IEA) issued its flagship World Energy Outlook (WEO) report this month, which emphasized three main game-changers of the world energy landscape to date: explosive development of unconventional oil and gas in North America, increased Iraqi oil production, and energy efficiency. Presenting the report at the Carnegie Endowment for International Peace on November 27, 2012, IEA’s chief economist, Fatih Birol, stressed that the “foundations of the global energy system are shifting, with implications on everyone.” Rapid developments of unconventional oil and gas in the U.S. and Iraq’s oil production have played an important role in this shift. In fact, the most interesting point of the report is the ambitious projection for the U.S. and Iraq. Fatih Birol said that the U.S. will overtake Russia and Saudi Arabia in oil production by 2017, noting that while the U.S. may become the largest oil producer, Saudi Arabia will continue to remain the largest exporter of oil. Meanwhile, Iraq would account for 45% of the growth in oil production by 2035, according to IEA.

But these projections may be too modest, at least according to Leonardo Maugeri, a former Eni SPA executive who is currently a fellow at the Harvard Kennedy School’s Belfer Center for Science and International Affairs. Maugeri argues that oil production levels in the U.S., Iraq and Saudi Arabia could be much higher than what IEA predicts in its WEO report. Basing his statements on studies he is currently conducting, Maugeri believes that Saudi Arabia’s “production capacity would still be higher than that of the U.S., but probably the Saudis will not exploit it fully, in order to support oil prices.” Similarly, he believes that IEA’s projected oil output of 6 million barrels per day by 2020 was low and the Agency “seems too cautious about effects of investments and new production technologies.” In short, the world has not run out of oil; rather the opposite, it may be entering the era of oil abundance.

Clearly, energy abundance is good news. But there are a few important caveats. The long-term future and implications of the revolution in technology, namely, hydraulic fracturing and horizontal drilling, that changed the U.S. energy landscape overnight, are likely to be less concrete than they seem at the moment. We do not know what kinds of regulations await the development of unconventional energy sources down the road if there is a serious accident or if the industry fails to win the tenuous public trust due to poor environmental practices. There is ongoing tension between the energy industry and communities in the U.S. that resist drilling of shale gas and oil on their territories.

The future of Iraqi oil is also uncertain given the many challenges it faces, ranging from domestic divisions and grave security problems to geopolitical threats (influence of Iran, competition in energy markets with Saudi Arabia, split of the northern Kurdish region, dependence on water supply from upstream neighbors to support oil production). Iraq still sorely lacks the hydrocarbon law, which is crucial to the development of its energy sources. So perhaps, it is wise to be less ambitious in making projections on production levels of energy in the U.S. and Iraq, which are in abundance, but are as much subject to sound policies as they are to wildcards. Most importantly, we should not be blindsided by the abundance, but put emphasis on energy efficiency. A sound energy policy in any country cannot be without energy efficiency given the ever growing energy demand, rising world population as well as concerns over climate change, something that Fatih Birol strongly emphasized in his presentation this week.

Saturday, November 17, 2012

Growing Crisis of the U.S. Electrical System

Hurricane Sandy was just the latest test to the resilience of the U.S. electrical infrastructure, which has proven again to be woefully weak and outdated. According to Bloomberg, Sandy left “more than 8.5 million homes and businesses across 21 states” in dark on October 29, with 1.4 million still remaining without electricity last week. Sandy is one of the latest storms that brought a mass blackout to the East Coast, following the June 2012 derecho, Hurricane Irene in August 2011, and a snowstorm in October 2011. Some analysts predict that storms will become increasingly harsh with climate change.
But aside from putting the blame on severe storms, aging electricity infrastructure of the country has been begging attention for a while. While some parts of the electrical system are modernized, certain grids in the U.S. date back to a century ago. CNN reported in 2010 that “non-disaster U.S. power outages [were] up 124 percent since early 1990s [and] U.S. electricity reliability [is] low compared to some nations.” By 2010, nearly 50,000 consumers were affected by non-disaster electricity outages.
Sandy’s aftermath has generated a heated discussion among energy experts about upgrading the electrical infrastructure, integrating smart grid technology to effectively control and respond to a potential crisis, and burying power lines. While they come with a massive cost, it appears that the U.S. is bound to bear heavier economic losses by prolonging the inevitable dealing with the problem. The alternative is learning to live in darkness.

Tuesday, October 30, 2012

U.S. One of the Top Gas Flaring Countries in the World

Women’s Council on Energy and Environment published my article on flaring of associated gas in the U.S. last week. Gas flaring is becoming a major issue for the U.S. with the rise of North Dakota’s oil production from its Bakken Shale formation, which reached 660 thousand barrels per day (bbl/d) in June 2012. Oil extraction from the Bakken Shale accounts for a substantial amount of associated gas, which is a raw natural gas released as a result of petroleum production. Natural gas is often found in oil wells, where it is either dissolved in crude oil or exists separately in a form of a cap above oil.

With a back-to-back 5 percent rise in oil output every month, North Dakota does not expect the pace of production to slow down. Rapidly growing oil production and infrastructure problems are starting to pose serious environmental challenges. The United States now ranks as one of the world’s top five flaring countries, according to the World Bank’s recent report. That is largely due to the rise in oil drilling in North Dakota. In 2011, the United States represented 5 percent of all gas flaring. Presently, most companies burn off associated gas rather than invest in pipelines and processing plants to capture and sell the gas because of added costs.
With no regulation on gas flaring at the national level, largely due to a limited flaring problem since the 1970's, it is also becoming an issue in the Eagle Ford shale field in Texas, as well as potentially in other states endowed with unconventional oil sources, such as Ohio, Oklahoma and Arkansas. Given the size of the Bakken Shale play and expansion of shale drilling in other states, the era of the U.S. unconventional oil and gas seems to portend not only massive infrastructure changes to streamline transportation of domestic crude oil and gas, but also a more careful regulation of this relatively novel industry to prevent an environmental backlash.


Wednesday, October 24, 2012

Iraq’s Oil Boom: Pie in the Sky or a Cautionary Tale

Iraq can become Saudi Arabia of today in terms of size the economy and wealth in the next couple of decades, if it develops its hydrocarbon potential. Those were the words of Fatih Birol, chief economist with the International Energy Agency (IEA), who presented the agency’s new “Iraq Energy Outlook” report at the Center for Strategic and International Studies on October 22, 2012. Iraq has been steadily increasing its oil production, now ranking as the second-biggest producer after Saudi Arabia. According to an Iraqi oil official, “oil exports were expected to rise above 2.8 million barrels per day (mbpd) this month [October 2012] with shipments on the rise from both the north and south of the country. Exports of 2.6 mbpd in September were already the highest in more than 30 years.” IEA’s central scenario predicts that oil output in Iraq would increase to over 6 mbpd in 2020 and reach 8.3 mbpd by 2035, largely driven by developments of super giant fields in the south.

Although cautiously optimistic about Iraq’s ability to fulfill its oil potential, given its currently dire political, security and economic challenges, Fatih Birol predicts that this Middle Eastern country will account for nearly 45 percent of the growth in global oil production between 2011 and 2035, if it does it right. The rest of the members of the Organization of Petroleum Exporting Countries (OPEC) will provide 42 percent, with non-OPEC nations filling about 12 percent of global oil production. According to Birol, Iraq is set to play a crucial role in global oil markets, even with conservative estimates about its oil production.

Meanwhile, Iraq’s Kurdish autonomous began selling its oil to global markets this month through independent export deals with two of the world’s major trading houses, Trafigura and Vitol. This move presents a further challenge to the central government’s attempt to exert its full authority on trading oil and gas in the country. With little leverage on the trading houses because of its own dependence on them to import refined oil products, Baghdad is basically powerless to rein in on them or on Kurdish trading. Kurdistan’s latest move drives a wedge to the already tense relations with Baghdad, after they recently survived a major dispute over payments for oil exports.

In Fatih Birol’s view, political consensus on oil governance and legal framework, such as the long-awaited hydrocarbon law, speed and coordination of investment along the supply chain, Iraq’s long-term oil and natural gas strategy as well as international market conditions would be determinants of the country’s pace of oil and gas development. It appears that without addressing the Kurdish question in the short to medium term, production of oil and gas in Iraq will be uneven and chaotic. What is worse, Baghdad could find itself in a potential real clash with the north if it keeps ignoring de facto energy deals of the Kurds with foreign companies and does not work out a mutually beneficial deal with the autonomous region.

Thursday, October 11, 2012

Book Review: “America Needs America's Energy: Creating Together the People's Energy Plan”

This summer I attended a discussion of a book by Mark Stansberry entitled America Needs America's Energy: Creating Together the People's Energy Plan at The Fund for American Studies in Washington DC. Given that DC is a regular stomping ground for many events on energy, I was not sure how this one would be different. Having read the book, I think it is quite timely and relevant. What is interesting about Stansberry’s book is that it is not just an overview of energy issues facing the U.S., replete with policy recommendations to high level officials, but he calls for Americans to take individual responsibility for their use of energy, to be better educated about the industry, and to get involved in crafting an energy plan for the country.
In Stansberry’s view, the ability for the U.S. to maintain its economic growth and standard of living (true for just about any other country in the world), it needs security of energy supplies, which cannot be achieved without a strategic energy plan that has been missing for decades. According to Stansberry, a national energy plan is long overdue to meet the demand, to secure supply, to more effectively and efficiently build energy infrastructure, to harness new technologies as well as to bridge the knowledge gap between energy users, policymakers and the industry. He provides a general overview of major energy sources used in the U.S. with their pros and cons and changes in supply and demand over the past few years. For those who work in the energy industry, most of the factual information in the book may not be too in-depth, but valuable nonetheless.
The most interesting part of the book for me was the chapter on “Energy Education,” where Stansberry’s take on the importance of a public-private partnership to educate ordinary people about their energy  use and to change their perception of the industry resonated strongly with what I have been thinking a lot lately. Without advocating the fossil fuel industry, it is worth remembering that it is unarguably an important part of our lives along with, hopefully, the growing share of renewable sources of energy. As Stansberry notes, “nothing moves without energy […] our quality of life is dependent upon the development of all forms of energy, as well as the conservation of our natural resources.” Without knowing, or more importantly appreciating, what aspects of our lives are touched, changed and improved by use of energy, nobody can truly value where and how it is obtained. In my view, Stansberry’s emphasis on starting “Your Personal Energy Journal 2012-2016” is a brilliant way to begin to understand your personal energy consumption and to create your personal energy plan in hopes to ultimately integrating the well-informed citizenry to discussion on creating a comprehensive, regional, state, and national energy plan. I know I will start using the charts on individual energy use provided in Stansberry’s book, and hopefully others will start, too.

Monday, September 24, 2012

Who is Holding the Cards?

The booming U.S. shale oil and gas production is not necessarily a recipe for the country’s energy independence because China will prevent the U.S. from reaching it. So goes the argument of an article by Matthew Hulbert featured in Forbes on August 23, 2012. In Hulbert’s view, China’s relentless acquisition of physical assets and sucking out of the North American energy will basically render the notion of energy independence an illusion.
While Hulbert makes a good point about China’s active role in gaining a foothold on North American energy market both in terms of investment and imports of oil and natural gas, it appears his argument on China stopping the U.S. from reaching energy independence is as uncertain as China’s ability to single-handedly rebalance WTI and Brent crude oil benchmarks. The starting point for energy-hungry China is to increase supplies at home and from abroad and the U.S. is potentially an important supplier. The frenzy to gain access to the North American energy market is driven by China’s goal to obtain technological know-how to develop its own copious reserves of shale gas as well as to secure oil and gas supplies. China’s access to North American physical assets would help China achieve these goals. But China would not be the one calling the shots in the U.S., which is dominated by domestic energy majors as well as foreign investors other than China. 
For better or worse, America acts in its self-interest in terms of its energy supply security. It is a country that instituted a law banning crude oil exports under the Mineral Leasing Act of 1920 and Outer Continental Shelf Leasing Act. The ban has eased somewhat in recent years due to booming domestic shale oil supplies. But as recently as March 2012, Congressional Democrats sought a bill that would ban any export of American oil to keep energy costs down. It make sense to sell them abroad because most local refineries are better fit for processing heavier crudes. It is possible that U.S. may export its excess cheap natural gas to China, but it will be sensitive to changes in domestic market fundamentals and prices, which will determine the level of exports. At the moment, U.S. would benefit from clearing the natural gas glut, but it is uncertain that low domestic natural gas prices and exports will be a long-term development. A change in domestic gas demand and price will affect how much of it will continue to be exported.
One thing that Hulbert is on point is America’s inability to insulate itself from fluctuations of international oil prices because of their interdependence. U.S. cannot control that, so full energy independence as such may never be achieved.

Tuesday, August 21, 2012

US: Higher Gas Prices with Plenty of Energy Supplies

Oil prices are on the upswing in the U.S. again. National average for a gallon of gas has increased by 34 cents since July 1. Factors that attributed to the spike include anticipation of more stimulus aid to Western and Chinese economies, uncertainty over the status of the Strait of Hormuz as a result of tightening sanctions against Iran and its threat to close the globally important waterway, high driving season that summer tends to be, production disruptions in South Sudan and North Sea as well as a few refinery outages in the U.S. Some observers predict the price of gasoline would ease after Labor Day, which might just happen without releasing oil from the U.S. Strategic Petroleum Reserve.

In fact, there is no shortage of oil in the U.S. right now and, if anything, oil production and refining have been on aggressive rise. What seems to matter to understanding the vagaries of oil prices is not necessarily the scarcity of domestic oil supplies, but global market reactions to geopolitical events and sudden changes in physical factors, such as refinery shutdowns. In fact, recent developments in the U.S. refining sector should give signs optimism about supplies of refined oil products available in the country. U.S. could benefit more from it once prices of various domestic crude benchmarks narrow (e.g. Louisiana Light Sweet, West Texas Intermediate, and Bakken); if its capability to refine both heavy sour (Canadian imports) and sweet crudes (from domestic shale formations) improve; and if more supplies become available to the East Coast.  All three factors appear to have positive indications. It is worth noting that the Atlantic region has faced a price spike at various times due to limited refining capability on the East Coast and relying more on imports of sweet crudes from abroad.

In recent years, availability of copious supplies of oil and gas in the U.S. boosted its refining industry, which has been increasingly willing to “improve value through share buybacks and dividends” and investments in upgrading a lot of its coking capacity to profit from processing heavier crudes. It is likely that easing of prices for refined oil products, including gasoline, may maintain for a few years in the U.S., aided by a recent reversal of the Seaway pipeline from Cushing, Oklahoma, to Texas and with weakening of Louisiana Light Sweet and Brent crude benchmarks, which have traditionally been linked to refined oil products. In the end, the level of domestic oil supply alone cannot be the answer to price fluctuations, but it can be found more in exogenous factors such as weather, a geopolitical crisis or war, shifts in global oil demand and supply, natural disaster, or unexpected production or refinery shutdowns here or abroad as a result of these.

Wednesday, August 8, 2012

Love It or Hate It, You Need the Keystone Pipeline

The controversial Keystone pipeline is in the news again after the Canadian pipeline company, TransCanada, secured last three permits from the U.S. Army Corps of Engineers to extend the southern leg of the pipeline to the Gulf Coast. This move upends the January 2012 rejection of the Keystone XL pipeline by the U.S. Department of State, which was reportedly based on insufficient time to evaluate the pipeline’s environmental impact. Unpopular among environmental groups in America, the Keystone pipeline’s new extension is likely to generate another wave of disagreements and protests over a potentially damaging impact of the heavy and low-quality Canadian oil on ecosystem of the U.S. Some of my friends have been eager to express their disappointment and frustration in various social media outlets on the approval of the Canadian pipeline at what they see the time of hastening rate of climate change.

But Keystone is, in many ways, inevitable for the U.S. The country is still over 90 percent reliant on gasoline for transportation and it seems like people here tend to forget (or to not know) how the recent history of U.S. oil production, trade and refining have permanently changed the types of oil used in the U.S.  Steady decline of U.S. sweet crude oil output from the early 1990s through the middle of 2000s have led to a change in the relationship of the West Texas Intermediate (WTI) benchmark towards other regional benchmarks, shutdown of many refineries in the Gulf Coast and reversal of directions of some, as well as to an increased demand for more offshore imports of sweet crude to meet local refinery needs, including rapidly rising Canadian supplies.

As imports of Canadian synthetic crude oil to the U.S. began to increase, Gulf Coast refineries were adjusted to handle heavier crudes from the northern neighbor. In fact, the recent surge in shale oil development in places such as North Dakota, which ramped up domestic sweet crude production again, is likely to find a good market abroad since “the Gulf Coast refining hub is more suited to process heavier crudes,” in the words of the recently appointed head of the Energy Information Administration (EIA), Adam Sieminski. Canadian oil, which stood at number one in U.S. net crude imports (29 percent) in 2011, is bound to increase its market share in the U.S. via the existing Keystone pipeline and its planned southern leg. So, what to do with the dirty Canadian oil? The answer lies in oil (gasoline) consumption of every American, who cannot, and should not, separate the influx of dirty oil from Canada from his/her own contribution to its rising supply to the U.S.

Thursday, July 12, 2012

China in the Driver’s Seat on Direct Coal-to-Liquids Production

Coal is here to stay. More in some countries than others. In places like China, while coal is still king, its role appears to be slowly morphing to liquid fuels such as gasoline and diesel. With the world’s third largest reserves of coal after Russia and the U.S., China sees the future in coal-to-liquids (CTL) fuels in order to reduce dependence on foreign oil and to maintain robust domestic CTL production as an alternative to petroleum. Despite environmental and economic costs of producing liquid fuels from coal, China’s state-run Shenhua Group began profiting from its first direct coal-to-liquids (CTL) facility in Inner Mongolia Autonomous Region, China, and producing 216,000 tons of refined oil products in the first quarter of 2011. Although China wavered to use the CTL technology in 2008 due to high production costs and concerns with water use, its push forward resulted in stable production for the past nine months, bringing in 100 million yuan ($15.38 million) in earnings in the first quarter of 2011 to Shenhua.

Direct-liquefaction CTL, which converts coal to liquid fuels by way of heating finely ground coal above 400 degrees Celsius with hydrogen and a suitable catalyst and further processing to obtain naphtha and middle distillates, has not been widely used in the world yet. The reasons include high production costs, technical challenges, comparatively cheap global oil prices that make it difficult to invest in expensive CTL technology, as well as its carbon footprint, which would not be insignificant due to emissions from hydrogen production and thermal loss. There have been long-standing concerns with toxicity and carcinogenicity of liquids produced from direct CTL fuel production, which still warrant detailed studying. For these reasons, the CTL industry has not developed in the U.S., another country with vast coal supplies.

It is unlikely that CTL will gain much traction in the U.S. in the near term, particularly given its massive shale oil and gas production that have further displaced coal in its energy mix. But China’s continued experimentation with direct CTL production to make it economically viable and less taxing on the environment, or failure to do so, would be worth monitoring and taking a note. The true cost-benefit analysis of the direct CTL technology and any serious attempt to develop or invest in it in the U.S. might occur when domestic natural gas prices begin to rise from their current historic lows as well as sustained high crude oil prices.

Thursday, July 5, 2012

The Elephant in the Room: Fuel Exports

Much has changed in the U.S. energy landscape that some of the unthinkable scenarios of the yesteryear might just be realistic these days. For example, the U.S. is beginning to flirt with the idea of potentially exporting natural gas, coal and maybe even crude oil.  At least in the words of the newly appointed head of the Energy Information Administration (EIA), Adam Sieminski, the U.S. should be open to crude oil exports to benefit its economy, particularly because the “selling the U.S. oil abroad could help provide a market for light sweet crude produced from shale formations in places like North Dakota, since the Gulf coast refining hub is more suited to process heavier crudes.” While Sieminski’s proposition on oil exports will need to overcome the U.S ban on selling most unrefined crude oil under the Mineral Leasing Act of 1920 and the Outer Continental Shelf Lands Act, which make oil exports nearly impossible, the possibility of exporting natural gas and, especially, coal appears to be less far-fetched, partly because they have created a huge glut in the country.

Proponents of the idea of exporting natural gas from shale formations, production of which increased from nearly nothing to 23 percent of all U.S. gas production in 2010 with prices hovering around $2.8 per million British thermal units, point out that prices and profits are likely to stay depressed for decades without alleviating the glut of natural gas. They have a point. Given that the surge in shale gas production began inevitably eating into the coal market in the U.S. with its record low prices and coal-to-gas switching, King Coal maybe looking at markets abroad as well, particularly since demand for coal is rising in Europe. Reportedly, U.S. coal companies “are spending at least $530 million to increase their coal-export capacity in order to meet high overseas demand.”

Exporting U.S. energy sources may not be swift, but it will be unavoidable provided that the gas glut and unused coal stay idle in the U.S. market. And too bad that it is not receiving as much attention in the government as it should. Even if opponents of natural gas exports argue that keeping gas prices low would be key to many industries, including domestic manufacturing and transportation sectors, few politicians on both sides of the aisle appear to be opposed to gas exports. But even fewer politicians openly state their support to exports lest should they be accused of causing domestic price hikes.  And even if there is an eventual agreement to export natural gas, it looks like there will be cap on the amount. As Cheniere Energy won the bid to build an LNG export terminal in Louisiana to begin operation in 2015, political will to agree on exporting fossil fuels in the U.S. may emerge by that time. Perhaps, it will be ushered in further with influential figures such as Sieminski. When that day comes, the ultimate question will be how much energy should be exported.

Thursday, June 28, 2012

Challenges of China’s Fuel of Choice

The Chinese economy has grown by an average of 10 percent a year over the past two decades, crossing the milestone to become the second-largest economy and energy user in 2010 after the U.S., as well as the world's largest emitter of greenhouse gases. Stable energy supplies being at the core of China’s rise, they remain pivotal to its continued economic growth, especially coal, oil and gas. While coal still constitutes around 68 percent of China’s energy use, Chinese policymakers and energy executives lean more and more towards cleaner fuel sources, particularly natural gas. According to International Energy Agency’s June 2012 report, the share of natural gas is set to rise in China’s energy mix, which is expected to have strong implications on the country’s energy usage in the years to come.

Analyzing the new role of natural gas in China, my new article published in Oilprice looked into China’s natural gas policy, main players in its gas market and problems it faces with the rise of Central Asian gas imports (full article can be accessed here). I concluded that mounting natural gas demand, combined with the official endorsement of clean energy sources, is bound to solidify the position of natural gas in China’s energy mix in the years to come. But liberalization of domestic natural gas prices will be absolutely key to attracting private investment to successfully develop domestic gas and to continue importing this energy source without hurting Chinese energy companies.

Wednesday, June 20, 2012

Why U.S. Shale Gas Will not Be a Cookie Cutter Model

A new report of the International Energy Agency (IEA) on unconventional natural gas earlier this month predicted that “global exploitation of shale gas reserves could transform the world's energy supply by lowering prices, improving security and curbing carbon dioxide emissions.”  But unconventional gas revolution may fall short of its promise if social and environmental issues are not adequately addressed. The IEA report points out many common concerns about shale gas extraction in the U.S. and other countries.  Chiefly among them are groundwater and air pollution, dangers of structural faults in well drilling, disposal of flowback water, and emissions of polluting gases from wells, which are some of the factors of public skepticism about the industry’s safety.

As more countries begin to tap shale gas, the learning curve promises to be steep.  Countries with major shale gas reserves, such as China, Australia, Poland, and Canada, are aware of the long lead times, high capital and operational costs, necessary price environments to attract investment, and the importance of overcoming regulatory and environmental constraints before this resource becomes a reality.  Just this week, Europe’s biggest shale potential in Poland came under question and confusion after ExxonMobil pulled out of shale exploration in this Eastern European country due to unsatisfying findings, legislative foot dragging and complex geology.

Conditions that existed in the U.S. to revolutionize this industry may not exist in other countries to easily replicate its success, which include geological differences, inadequate or lack of access to equipment, water, manpower, and infrastructure as well as complex land ownership issues. Because maturity of the shale gas industry outside the U.S. will take anywhere from five to ten years before it reaches commercial production levels, developments in this unconventional gas sector in America are likely to set the tone to other countries.  In other words, what happens in the U.S. shale gas is bound to have ramifications on the trajectory of the industry elsewhere because the U.S. is far ahead of the rest of the world in exploiting this energy source. 

As much as there is enthusiasm and effort to follow the footsteps of the American unconventional gas evolution, a possible serious incident in the U.S. shale gas may set the newly emerging industry back in the rest of the world.  Given an already complex set of costs and public concerns over hazards of shale gas in many countries, an incident in one country is likely to cause more stringent regulations, and even more moratoria, in others.  In such a scenario, costs of drilling and operations are likely to be even higher for investors and operators with an added challenge of winning hearts and minds of the distrustful public.  The U.S. may have brought down the costs of taking natural gas out shale rocks, but its global success and acceptance will hinge on minimal mistakes and no major disasters.

Friday, June 8, 2012

Obama's Energy

As the election day draws closer, U.S. President Barack Obama’s record on energy is increasingly under scrutiny with mixed conclusions. The left praiseshis record to date, as the right remains highly criticalof it. The point of contention is not just the yoyoing oil prices and the delayed Keystone XL pipeline. It is also about debate over domestic oil and gas production and Obama’s support of renewable energy. Although unconventional oil and gas production saw a major increase in recent years, leading to a creation of many jobs in the shale gas and oil sector, as well as reduction of oil imports for the first time in a long time, the American Petroleum Institute (API) insistedthat the “White House is lying to the American public when it says its policies are responsible for increased oil production.” According to API’s PresidentJack Gerard, “Obama is taking credit for policies enacted under the previous administration.”

Politics and politicization of energy aside, while the Obama administration made mistakes on some key matters, e.g. shelving Keystone XL or blowing money on Solyndra and other less than economically sensible solar projects, it did not interfere with the production of shale gas and oil that transformed the energy landscape of the U.S. It is important to remember that as much as any U.S. President would be keen to have an exclusive access to a magic red button to bring up or down oil prices, they are not – and will never be – under his or her control. It is a deliberate misrepresentation to put globally-driven high oil prices on a president of a country, unless that president is a cause of a major world event, such as war, natural disaster or depletion of oil.

At this point, nothing major in the energy sector is likely to happen before the November elections. So, the focus should be on the outlook of the U.S. energy policy that goes beyond bumper stickers of the extreme left or right. As the unconventional energy business matures, the level of regulation at the state and federal jurisdictions is likely to remain a source of contention both sides of the aisle. If Obama is re-elected, his record on energy will be further put to test, depending on how his administration regulates the shale gas and oil industry, how many drilling leases on federal lands will be issued, when onshore drilling permits will come to life, what happens with clean energy, and how the right and left will react to them. Obama’s challenge will be living up to the “all of the above” plan and providing leadership to develop an unpoliticized comprehensive energy policy for the country.

Thursday, May 24, 2012

The Vision Thing

As U.S. oil and gas production is back in the game, there is growing faith that achievement of full energy independence is just over the horizon. According to the U.S. Energy Information Administration’s (EIA) Annual Energy Outlook 2012, net imports of energy have been declining in the U.S., which is largely attributed to an increase in domestic oil and natural gas production. EIA anticipates an increase in U.S. crude oil output from 5.5 million barrels per day (mbpd) in 2010 to 6.7 mbpd by 2020. Echoing this positive scenario, a recent conference of the International Association of Drilling Contractors was upbeat that U.S. unconventional oil and gas production would bring net imports to zero in the next 6-7 years, the only wildcards being a possible geopolitical problem, such as war with Iran, and stricter limitations on drilling imposed by the Environmental Protection Agency (EPA).

The confluence of the Great Recession and affordability of drilling techniques and technologies such as hydraulic fracturing and horizontal drilling was a silver lining in a cloud of declining oil production in the U.S. over the past 40 years. While reliance on more domestic energy sources and less on foreign ones is good news, it is unclear whether the U.S. will learn to be a prudent energy user or continue taking energy sources for granted and expect gasoline prices to be permanently below $3 a gallon. There is still a danger that a potential accident from the production of unconventional energy sources may have a backlash on the industry and slow it down with regulations that would carry huge ramifications on the economy.

More importantly, it is uncertain whether the newfound energy bonanza will hamper development of a sorely missing comprehensive energy policy in this country that would not rely on short-term gains and low energy prices or politicization of one resource over another at election times. There is no guarantee that the abundance of unconventional energy will not taper off in coming decades with the level of energy use in the U.S. up to now.

Wednesday, May 16, 2012

Happiness is Multiple Pipelines

North Dakota appears to be becoming a modern day Titusville. Topping Alaska in oil production, North Dakota is now a number two oil producer in the nation, just behind Texas and ahead of California thanks to the boom in shale oil. With 152.9 million barrels of crude oil output in 2011, this Midwestern state is enjoying the lowest unemployment rate in the U.S. at 3.3 percent, drawing a massive inflow of migrant workers from all over the country, and increasing in per-capita income by 78 percent, which is twice the national average. The only complaint of North Dakotans these days has to do with crowded roads and restaurants and shortage of hotel rooms due to boom in oil workers.

While U.S. is witnessing highest levels of oil production in years, with no signs of abating in the foreseeable future, distribution of oil abundance is likely to remain a challenge in the near term. The pipeline system in the country is inadequate to carry oil freely across the states since most of it traditionally was set up to bring refined oil and gasoline from the coasts to inland. Now the problem is moving massive amounts of oil from shale production in Texas and North Dakota, leading to a bottleneck in the U.S. major crude oil storage in Cushing, Oklahoma. As a result, the price differential between Midwestern and East Coast oil prices has been substantial.
An upcoming reversal of the Seaway pipeline from Oklahoma to Texas will provide cheap domestic oil to the refineries there, which would help reduce oil imports. While the reversal of Seaway may help balance the price of West Texas Intermediate (WTI), a North American benchmark in oil pricing, the situation is calling not only to be careful in assuming that it will bring down oil prices and keep them stable, which are still affected by international developments, but also to get serious with building more pipelines to move rising domestic crude across the country.

Thursday, May 3, 2012

Iraq’s Critical Juncture

Iraq is torn by its own contradictions again. For the first time since 1989 it is enjoying the highest level of oil production and exports, which averaged 2.51 million barrels per day (mbpd) in April 2012 with $8.8 billion in revenue, according to the Iraqi State Oil Marketing Organization. It anticipates oil exports to go up to 2.75 mbpd by the end of 2012.  Relying on oil exports for 95 percent of its income, petrodollars are important for this war ravaged country’s reconstruction efforts.  Iraq’s oil boom also helped make up the loss of the Iranian oil, as the West began tightening its sanctions on the latter. In fact, the major boost in OPEC oil supplies were from Iraq in April 2012.  As the country prepares for its fourth energy licensing auction to be held May 30-21 in Baghdad, it is bullish about becoming “the world’s biggest source of new oil supplies over the next few years,” particularly when one of its largest oil fields, West Qurna-2, comes online.

But there is a good chance that Iraq’s internal problems may hijack its growing role in the oil market.  Recent tensions between the country’s central government and the Kurdish regional administration exhibit signs of a brewing conflict that necessitate a comprehensive solution to the management of Iraq’s oil wealth and binding legal measures before it is too late.  Efforts of the Kurds to sign contracts with foreign oil companies and to sell oil and gas without Baghdad’s authorization have led to the central government’s hard line to foreign firms operating in Kurdistan, including denial of a bidding opportunity to ExxonMobil in the next round of licensing auctions.  Exchange of accusations of corruption, greed, fraud and illegal oil smuggling between the Kurds and the central government signals a potential conflict, which may activate secessionist attitudes of the Kurds as well as drive a wedge between delicate sectarian and ethnic relations. 

In this context, the influence of neighboring Iran, which is suffering from sanctions over its reported nuclear ambitions, on Iraq’s mostly Shi’a population is likely to grow given its vested interests in weak Iraq.  Adding public discontent to the mix due to the lack of security and dire living conditions in view of growing oil revenues may be another source of tensions.  Iraq appears to be at a crucial point in its petroleum production when it should heed the advice of one of its oilman who has been behind Norway’s oil success – exploit energy sources slowly to avoid resource curse and build institutions, transparency, and legislation to insure against it. 

Wednesday, April 25, 2012

U.S.: Avoid Oil Speculation Overkill?

President Barack Obama’s latest policy initiative to take a more aggressive stance against manipulation of oil markets received mixed reactions. The proponents of the measure, including Chairman of the Commodity Futures Trading Commission (CFTC), Gary Gensler, welcomed Obama’s proposal, noting that it “build[s] on progress the CFTC has made in making the unregulated swaps market more transparent and implementing new anti-fraud and anti-manipulation reforms.  Other federal agencies, including the Energy Information Agency, pointed out the role of oil supply disruptions from unstable parts of the Arab world as well as temporary interruptions from Canada, China and Brazil due to technical problems were key factors in elevated crude and gasoline prices. 

A bigger argument against Obama’s policy initiative appears to be that high oil and gasoline prices are not because of the presence of financial investors in the oil futures markets and “there is no evidence that the bulk of the financial investors taking positions in oil futures markets since 2003 have engaged in such activities.” According to the Chicago Mercantile Exchange (CME) Group, which sets margins for the benchmark U.S. crude oil contract, “speculation should not be confused with manipulation.”  Still, it is interesting that “speculators tend to buy crude when there is a strong underlying reason to do so such as the loss of Libyan crude last year or sanctions and possible military action against Iran” this year.  In fact, higher oil price bets by speculators at times of an anticipated supply crunch from Libya and Iran increased prices by $15-$20 a barrel. 

At this point, a prudent approach for the Obama administration to understand the oil futures market may be to monitoring it better, particularly since it plans to increase access to CFTC’s data, before setting trading margins on the market.  The latter may carry unintended consequences, such as making prices more susceptible to swings by squeezing out smaller investors out of the market and giving more influence to bigger hedge funds and banks.

Friday, April 20, 2012

New Federal Emission Caps on Fracking: To Be or Not to Be?

The Environmental Protection Agency’s (EPA) new cap on emissions in drilling natural gas this week is the first federal ruling to tackle air pollution tied to hydraulic fracturing.  According to EPA, the new standards would reduce the release of toxic and carcinogenic chemicals such as benzene, hexane and methane.  Natural gas producers would have two years to comply with the new standards.  Although the American Petroleum Institute (API), which represents 500 oil and gas companies, argued that the new standards would slow down the production of domestic natural gas and cost hundreds of millions of dollars, some gas drillers did not think the costs would slow down the gas boom in the U.S.   Gas producers, such as Southwestern Energy Co. and Devon Energy Corporation, stressed that they already have technology in place to capture fugitive methane, an important greenhouse gas. 

Pollution related to drilling natural gas does remain a source of concern.  For example, emissions from gas wells in Wyoming attributed to the increase in ozone levels to the degree that the government may need to “declare parts of the state as an ozone non-attainment area.”  But drilling for gas has not been delayed in Wyoming or Colorado, “where technology to capture emissions has been required by state since 2009 and 2010.”  Development of shale gas in Arkansas’ Fayetteville Shale by Southwestern has been also relatively successful due to cutting costs of emission capturing from $20,000 per well to zero.

While EPA’s new environmental measure is a step towards improving environmental standards of the booming shale gas industry in the U.S., there is a potential for over-regulation of the industry or duplication of efforts already undertaken by the industry to control emissions.  Shale gas has completely transformed the U.S. energy landscape, making the country self-sufficient in natural gas.  The low cost natural gas is reviving the manufacturing and chemical industries in the U.S., shifting the heavily coal-based utility sector to gas, and bringing down the prices of heating and electricity to consumers.  Regulatory slowdown of the industry would have unintended consequences to the economy. 

At this point, addressing casing and cementing of shale gas wells as well as usage and treatment of the flowback water appear to be the most important environmental challenges facing the industry.  But before slapping a one-size fits all regulation to appease environmental groups, it is also crucial to look at functioning state regulations that already exist as well as voluntary self-regulation practiced by some gas producers to avoid major accidents.

Thursday, April 12, 2012

U.S. Energy Independence: Optimism with Caution

A recent announcement by the White House that onshore drilling permit application reviews would be cut by 80 percent is good news of the month. According to the Secretary of the Interior, Ken Salazar, the measure will “make oil and gas permitting and production on public lands a reality [and] the automated permit application process, which is expected to be in place in early 2013, would be similar to a program already in place for offshore drilling permits.” The new automated processing of applications would reduce the permit review process from 298 days to about 60 days. With gasoline prices highest since 2008, Republicans criticized the Obama administration for foot dragging in issuing drilling permits and obstructing exploration and drilling in public lands. Simplification of the review procedure will further help usher the development of energy in the U.S., which has seen a renaissance over the past five years thanks to shale gas and oil supplies.

As access to federal lands for oil and gas exploration expands, some analysts optimistically predict that the U.S. is bound to significantly increase domestic oil production and reduce its dependence on foreign oil. According to Raymond James and Citigroup, U.S. oil imports will fall from 9.8 million barrels per day (mbpd) in 2011 to 4.5 mbpd by 2015 and reach zero net imports by 2020. Analysts in these companies believe that ramped up deepwater production from under the Gulf of Mexico and natural gas liquids output will account for such a dramatic change in the U.S. energy landscape.
This forecast seems to be overly optimistic. While increased domestic oil production is an important factor behind the growing U.S. energy independence, changes in the country’s hobbling economy, weak oil demand, increased physical supply, or the above average increase in crude inventories may carry implications on how the U.S. energy market would evolve. In other words, it may be too ambitious and misleading to put definitive timeframes by which the U.S. would be a zero net importer of oil. Another important factor that continues to impact oil prices is the role of energy market speculators, an interesting perspective on which is given by Forbes:
The U.S. oil production increased since 2008 from 4.95 mbpd up to 5.59 mbpd [but] is so small that U.S. supply increases have no discernible impact on the price. If oil prices were determined solely by supply and demand for oil, U.S. production might matter more to the price. But what matters most to the price of oil is the positions that speculators — who do not take delivery of oil – take. When oil hit $147 a barrel [in 2008], investigators found that those speculators accounted for 81% of the trading volume in the oil markets. There’s an easy way to take those speculators out of the oil price equation: raise the amount of capital they need to invest in their bets on the direction of the price of oil. And when the commodities exchanges require the speculators to increase the amount of their own capital — dubbed margin — into their bets, the price of oil seems to go down.

It is hard to imagine the U.S. energy market not to continue being impacted by global oil prices and by speculators in the future, given that it is already happenning at a time when the country has reduced dependence on foreign oil and boasts highest domestic oil production in eight years. Do correct if I am wrong.

Friday, March 30, 2012

Trans – Caspian Gas Pipeline Still a Pipe Dream?

Potential major developments in the Caspian energy landscape may be underway, but laden with more doubt than certainty. Negotiations between the European Union (EU), Azerbaijan and Turkmenistan on building a much debated Trans-Caspian Gas Pipeline (TCGP) has led to an agreement in principle in March 2012. A key point is that under such an agreement, Azerbaijan and Turkmenistan would also overcome disputes over the ownership of the Kapaz/Serdar oil fields in the Caspian for the TCGP project to move forward. But TCGP’s imminence may be unrealistic for a number of reasons.

First, Azerbaijan and Turkmenistan continue to hold differing views on the sectoral demarcation of the Caspian Sea. Unless both countries reach an agreement on the disputed Kapaz/Serdar hydrocarbon deposits, there will be no TCGP. Second, while some analysts argue that legally there would not be problems if both countries sign a bilateral deal on the status of the Caspian Sea, its other littoral states are bound to disagree and protest it. Namely, Russia and Iran are against TCGP because it does not serve their commercial or geopolitical interests. They have invoked at various times the unresolved legal status of the Caspian and environmental threats in building an undersea infrastructure. Iran sent troops to the Caspian area when an attempt to begin development of a field in the so-called 'gray zone' was made in the late 1990s – early 2000s.

Meanwhile, Moscow continues to insist that only the Caspian littoral states have the right to decide on any pipeline traversing the sea. EU’s invitation of Kazakhstan to join TCGP and talks between the Austrian President Heinz Fischer and the Turkmen president Gurbanguly Berdymukhammedov in October 2012 on creating a legal framework for supplies of Turkmen gas to EU caused a bitter reaction from Russia. It is not ruled out that Russia may threaten to cut off gas supplies to the growing domestic consumption in Azerbaijan or exert pressure on Baku not to participate in the TCGP on the grounds of creating an unnecessary rival if Turkmenistan winds up supplying cheap gas to the Turkish market. In the long run, Turkmenistan and EU could agree to ship compressed natural gas via tankers, but it will depend on the availability of a pipeline to send the gas onward to European markets.

Lastly, the funding sources of TCGP are still unclear. As Rovshan Ibrahimov, head of the foreign policy department at Azerbaijan’s Centre for Strategic Studies, aptly pointed out, neither his country nor Turkmenistan would handle the risk of financing and running the project on their own. And it is doubtful that the EU would sponsor the project due to its lack of supranational mechanisms to implement a comprehensive energy agreement across several countries. It is uncertain who is willing to and can provide the guarantees to justify the risk.

Tuesday, March 20, 2012

Eastern Mediterranean: Horn of Plenty or Pandora’s Box

As the world watches the Arab Spring continue its struggle for freedom, an additional factor of instability (or an economic boon in the best case scenario) maybe unfolding before its eyes.  According to the US Geological Survey, the continental shelf in the eastern Mediterranean, which includes Cypriot, Lebanese, Israeli and Syrian waters, has an estimated 122 trillion cubic feet of gas and nearly 4 billion barrels of oil.  This relatively recent discovery has a potential to secure energy independence of its littoral states.
But because Lebanon is still in a state of war with Israel, Turkish and Greek Cypriots (including Turkey and Greece) are in a long-standing dispute over Cyprus, and the relations between Israel and Turkey are strained, exploitation of offshore natural gas is likely to open a fresh can of worms, if it is hijacked by politics.  With global majors scrambling to snatch up exploitation licenses in Cyprus and Israel, it is a crucial moment for each littoral state to define its exclusive economic zone (EEZ) before any offshore exploration and drilling activity begins.  As Nizar Abdel-Kader aptly points out, apart from establishing EEZ, “there may be a need for a regional conference sponsored by the UN with the main task of facilitating negotiations between Lebanon and Israel and between the Turks and Greek Cypriots […] to avoid future military conflict.” 

The tensions already heightened last fall in the eastern Mediterranean, when Turkey threatened to send its navy to prevent Greek Cypriots from drilling gas and to stop Israel’s unilateral exploitation of its offshore hydrocarbons.  In the wake of Israel’s gas discovery, Hezbollah issued a warning that it would defend Lebanon’s natural resources, which elicited a similar response from Israel.  It is the most opportune moment for UN’s assistance to address the maritime boundaries in the Levant Basin before a source of energy supply security turns to a source of another conflict.