Sunday, August 11, 2013

America: Exporting our way to energy independence?

Never let the facts get in the way of a good story. That's the credo of the oil and gas industry as it continues to lobby for increased oil and natural gas exports from the United States. After all, the industry claims, we're on our way to achieving energy independence, and we can help our balance of trade by exporting the extra hydrocarbons we produce. The data, however, contradict the industry's claim.

Even as the Obama Administration approved the country's third natural gas export terminal, the United States remained a net importer of natural gas. Production in the United States averaged 69.5 billion cubic feet (bcf) per day this year through May, the latest month for which data is available. But the country consumed 76.9 bcf per day. It IMPORTED almost 7.8 bcf per day from Canada. And, then it EXPORTED about 1.8 bcf per day to Mexico, a number that is likely to rise as pipeline export capacity to Mexico expands. (Both Canada and Mexico are part of an integrated North American natural gas pipeline system.)

The latest approval would lift the capacity for daily liquefied natural gas (LNG) exports from the United States to 5.6 bcf per day or about 8 percent of what we currently produce. The exports would be shipped using special freighters to Europe and Asia. Strangely, these exports would make it necessary for the United States to IMPORT more natural gas in order to support current consumption! The situation seems surreal, and yet, additional approvals for LNG exports are likely in the future.

Natural gas producers keep telling the public and policy makers that U.S. natural gas production is set to grow continuously for decades as they tap large shale gas resources using hydraulic fracturing. But the story isn't holding up. U.S. natural gas production has been moribund, bouncing along a plateau from January 2012 through May of this year (the latest month for which data is available). Monthly production last year averaged 2.11 trillion cubic feet (tcf), but was slightly less through May of this year at 2.10 tcf per month. This is despite prices that have nearly doubled from the lows in April 2012.

It's possible that the situation could change, but unlikely for two reasons. Production decline rates for natural gas wells in the United States are averaging around 32 percent PER YEAR. That means about one-third of U.S. production must be replaced EACH YEAR just to stay flat. And, that's really all that we've been doing for the last year and a half.

But the situation is likely to get much worse. Here's why: Gas from shale deposits is rising as a percentage of total U.S. production. Shale gas wells decline much faster than the current overall rate (which includes conventional gas wells), between 79 and 95 percent in the first three years. That means some 80 to 90 percent of all existing shale gas production must be replaced every three years. With shale gas, it is as if we are on a down escalator trying to go up; but, the down escalator, in this case, is increasing its speed, making any upward progress difficult, if not impossible.

Now, the Congress and the president could make the argument that oil and natural gas producers ought to have the right to sell their products to the highest bidders wherever those bidders are in the world--just as farmers and manufacturers in the United States do. This is a plausible and defensible position, well within the American experience. But this is NOT the argument they are making. And, it's doubtful that it would be a very popular one, for it means higher energy prices for Americans.

It's possible that the Congress and the president are just pretending that natural gas production is continuing to rise. In that case, they are knowingly deceiving the public--not the first time, of course, that public officials have done this. But, what would be worse is if they simply don't know the actual data. Then, they they must be labeled as grossly incompetent since the production, consumption and import data discussed here are all available online from the government's own U.S. Energy Information Administration.

The same analysis applies to American oil exports, but even more so. U.S. crude oil imports remain slightly higher than U.S. crude oil production. It's true that a portion of those imports are turned into finished products such as gasoline and diesel and then exported. But even after adjusting for this, the country continues to import just under 50 percent of its crude oil needs.

So, the rapidly increasing rail shipments of oil to Canada that we are witnessing do NOT reflect an America producing more oil than it needs. These shipments simply reflect an oil industry taking advantage of the higher prices that customers in eastern Canada are willing to pay.

(Wait a minute, you must be thinking, I thought Canada was a major oil exporter. It turns out that Canada is both an importer and exporter. For a more detailed explanation of this strange situation, see "Canadians could free themselves from oil imports, but will they?")

So, the real reason that the oil and gas industry wants a loosening of restrictions on exports of American-produced oil and natural gas is so that it can take advantage of higher prices abroad. This is particularly true for natural gas which sells in the United States for $3.32 per cubic feet (Henry Hub - August 9), but $11.60 in Europe (July 31) and $17 in Japan (July 31), a good proxy for Asian prices. There are costs involved in liquefying the gas for shipment via freighter. But, the profit margins are far greater than the profits currently available from domestic sales. In fact, there is reason to believe that major international oil companies which bought huge positions in U.S. shale gas plays a few years ago have been losing money ever since on those positions when all costs including the costs of acquisition are taken into account.

As a matter of policy, higher natural gas and oil prices within the United States would spur the deployment of renewable energy by making it more competitive. Maybe this is the secret agenda of the Congress and the White House. I very seriously doubt it. I think both are simply bowing to the wishes of the oil and gas industry, while hoping the public doesn't find out what's really going on. Worse yet, the Congress and the president may not really understand what's going on themselves.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now, The Oil Drum,, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at


cannuck21 said...

An excellent article.
Just yesterday I was hearing an 'energy expert' speak on just how the market for LPG was hugely oversupplied and that gas would be cheap in North America for many years to come.
One wonders where these 'experts obtain their information.

Anonymous said...

Using the most expensive drillings are counterproductive.

Expensive drillings help oil to remain very expensive and help OPEC to earn a lot of money.

Bernstein Research estimated that the marginal cost of oil production - the cost of production for the most expensive new fields - rose to $104.50 a barrel in 2012, up more than 250% from $30 a barrel in 2002.

For every $10 increase per barrel of oil price, OPEC's earnings soar by $100 billion per year.

Instead of using very expensive drillings in order to produce a small portion of the world's oil production, it would be a better idea to save oil.

In 2010, trucks used 13 million barrel of oil per day.
Industrial activities used 14 million barrel of oil per day.
Heat generation used 9 million barrel of oil per day.
Power plants used 5 million barrel of oil per day.
Ships used 4 million barrel of oil per day.

Using passives houses, using solar heaters, using double stack freight trains, using biomass boilers, using ships fitted with sails, using trucks powered by gas,.. the world could save around 10 million barrels a day without reducing car use.

Then, the oil market would be as it was 10 years ago when oil was far less expensive, even during the war in Iraq.

Anonymous said...

The article ignores the cost and availability of transportation. It is costly (due to odd regulatory rules) to ship gas from the Gulf Coast to the East Coast. Because of those regulation it ends up being less expensive (or competitively less expensive) to import gas from Western Europe.

While there are hundreds of thousands of miles of pipeline in the continental U.S. they don't cover all the U.S.

To make a general statement that if we are importing resources then it doesn't make sense to export them, ignores many factors.

Anonymous said...

There are lots and lots of gas deposits over there. And they will eventually bring it on line. When they do, we should take some of the money we make on ours now ( invest it wisely ) and buy theirs when the time comes.

Simple to say Hard to do.

Kurt Cobb said...

Thank you for your comments. It is puzzling given the actual trends why people posing as experts would be predicting cheap natural gas far into the future...unless, of course, they are not experts but spokespersons for a particular interest which is what I suspect cannuck21 witnessed.

The first anonymous commenter is correct that energy conservation is by far the cheapest source of energy.

The second anonymous commenter seemed to miss my discussion of the profitability of sending LNG abroad and shipping oil by rail to Canada. Of course, it's profitable or nobody in his right mind would do it. I'm questioning whether U.S. policy regarding exports is being based on a true premise. It isn't and good energy policy ought to be based on what it really happening, not what the industry wants us to believe is happening.

Finally, the idea that there are "lots and lots of gas deposits over there", presumably meaning Europe, ignores that fact that much of it already appears too costly to extract. Cost matters. Just because energy sources are in the ground does not mean they are profitable, either financially or in terms of energy return, to extract.

There is enough gold dissolved in the ocean to make all those who will read this piece billionaires. But it will never be extracted because the cost of extracting it is greater than the price you can get for it.

Anonymous said...

Some green technologies have been available for centuries.

- The solar heater is 246 years old.
In 1767, Horace Benedict de Saussure built the first solar oven.

- Biomass gasification is 227 years old.
In 1786, Philippe Lebon obtained gas with the gasification of wood.

- The hybrid sailing ship is 195 years old.
In 1818, the SS Savannah was the first ship what could be driven by sails and/or engine.

- The oldest standing straw-bale building in the world is 108 years old.
A straw-bale home can save a lot on heating and cooling costs.

Today, theses technologies could realy could save a lot of energy.

Anonymous said...

I was reading yesterday about Mexico's energy reform, it seems that they will start obtaining their natural gas from more shale deposits inside Mexico that have been untapped for years (and it seems there are a lot of wells). What will this play in the overall picture, supposing Mexico will be auto-sufficient in natural gas?

Kurt Cobb said...

With regard to Mexico's natural gas resources, the country has always had conventional resources that it has not tapped to their potential. I think this is the most likely source of additional domestic gas supply for Mexico. But it will take many years to build the infrastructure.

As for shale gas, you must remember that the very large numbers quoted are usually technically recoverable resource estimates. These are based on very sketchy data and they are definitely NOT reserves as is so often stated. Reserves are what can be produced using existing technology from known--that is, already drilled--fields for a profit at today's prices. Reserves are never more than a small fraction of resources.

As for Mexico's technically recoverable resources, first, they are not judged to be necessarily economically recoverable. Second, large technically recoverable resources in the United States have been downgraded in some cases by 80 percent after drilling begins and it becomes clear just how few sweet spots there are in the shale deposit. In Poland the downgrade was 90 percent across the country. We'll see about Mexico. But, I would say to beware of the hype.

In the short term, Mexico will be wanting more U.S. natural gas to run its economy. In the medium term, demand for U.S. gas may stabilize as Mexico develops its own resources.

Luis GarcĂ­a said...

Good article.
Only for clarification, the peak in gas production of Jan 2012 has been surpassed at least twice, in Oct 2012 and May 2013 (according to the source provided).
The claim that production stays practically flat since Jan 2012 stands clearly true, though.

Kurt Cobb said...

Thanks Luis for drawing this to my attention. I had flagged this before the July 31 update, and the updated data shows subsequent monthly peaks. I should have checked back. I've now updated the piece to reflect the average monthly output for 2012 and so far in 2013. And, those numbers show more clearly that production has been flat.