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.