Sunday, October 14, 2012

Oil and gas industry uses deceptive energy independence message to push U.S. exports

With gasoline scaling $4 a gallon recently, plans announced last week by international oil giant BP to export U.S.-produced crude oil ought to have Americans howling. For such a plan to be good energy policy--rather than merely profitable for the oil industry--the United States would have to be producing more than enough oil to meet its own needs. But the country produces nowhere near that amount. Nevertheless, the industry's deceptive campaign to make the public and policymakers believe that the United States is on the verge of energy independence seems to be succeeding--a push that is really just a smokescreen for selling the country's oil and natural gas to the highest bidder.

So far this year the United States has produced 6.2 million barrels per day (mbpd) of crude oil plus lease condensate (which is the definition of oil) versus daily net consumption of 13.6 mbpd of finished petroleum products. The country is a long way from being free of oil imports, and as I'll discuss below, there is no realistic prospect that we'll ever produce enough oil domestically to satisfy our needs at the current level of consumption.

That's why to date, except for minor sporadic shipments to a few countries and regular small shipments across the Canadian border, the U.S. government has allowed no other domestic crude oil to be exported. The BP request is presumed to be an attempt to bring oil produced in North Dakota to Canada's refineries on its east coast. The oil produced in North Dakota trades at a $20 discount to oil currently being imported from Europe by Canadian refineries.

Analysts believe BP can ship the North Dakota oil by railcar or other means to Canada and beat the European price. All things being equal that would tend to raise the crude oil price in the United States. The irony, of course, is that Canada exports much of its crude oil production to the United States, making it America's single largest supplier of imported oil. Nevertheless, differences in oil quality and oil transportation infrastructure appear to favor what BP is proposing.

Perhaps of more concern to American consumers is an export license request from a Swiss trading firm, Vitol, which presumably wants the ability to ship U.S. crude anywhere in the world it can get a good price for it. If that request is granted, it's open season on American domestic crude oil supplies.

To be clear, the price of oil in the United States is already based on world prices. This is because oil can be shipped using the world's ocean-going tanker fleet to wherever the price is highest. This tends to equalize prices across the globe once transportation costs are included. But, because the infrastructure in the interior of the United States is inadequate for cheaply moving the oil now being produced there to oil ports, the price of this oil trades at a discount to world prices. So, whenever companies or trading firms believe they can reduce transportation costs such as those from landlocked North Dakota, they will try to move oil that is underpriced to more profitable markets.

Natural gas is another matter. There is not yet an integrated worldwide system for moving natural gas wherever the price is highest. In North America natural gas is essentially a regional product. It can be moved via pipeline between the United States, Canada and Mexico, but there it stops. For that reason the glut of natural gas caused by overdrilling of newly available shale gas deposits has brought prices down dramatically, from $13 per thousand cubic feet (mcf) in mid-2008 to just above $3 per mcf today.

The glut has the industry saying the United States will soon produce all of its own natural gas. In practice, it's not working out that way. With supposedly vast supplies of natural gas now beneath their feet, Americans imported 14.2 percent of their natural gas needs in 2011, almost all of it from Canada, according to the U.S. Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy. For comparison, annual U.S. natural gas imports from 1990 through 2010 averaged 16.8 percent of total U.S. consumption. Progress, but not exactly energy independence.

The EIA projects, however, that U.S. domestic natural gas production will grow sufficiently so that the United States will become a net exporter of natural gas by 2022. Still, some analysts have cast doubts on such forecasts. In fact, claims that the United States has a 100-year supply of natural gas have been widely refuted. First, the claim was based on estimated resources. As I am obliged to remind people again and again, resources are what is thought to be in the Earth's crust based on sketchy evidence at best. Reserves, on the other hand, are what the drillbit has shown can be produced using existing technology at current prices from known fields. Proven and probable reserves of U.S. domestic natural gas add up to only 22 years of supply at the current rate of consumption.

Second, the refuted 100-year figure assumes that we will continue to use natural gas only at the current rate. But that forecast was being quoted by industry boosters who foresee vast new applications such as natural gas-powered vehicles which would greatly increase the rate of consumption and dramatically shorten the time to exhaustion. Here's how I explained the problem in a previous piece:
Simple spreadsheet calculations will tell you what you need to know about what happens to such claims under the pressure of a little exponential growth. At 2 percent per year growth...the 100-year U.S. domestic natural gas supply is exhausted in 56 years. If we assume that production peaks when about 50 percent of the resource is exhausted, this puts the peak within 35 years. Think about it. Even if the optimists are correct, with a production growth rate of just 2 percent per year, the country reaches a peak within 35 years! What will we do after that?

The picture gets acutely worse as the rate of production growth rises. A 3 percent rate implies exhaustion in 47 years and peak in 31 years. A 5 percent growth rates means exhaustion in 37 years and a peak in just 26 years. Now consider that domestic supplies are probably going to be less than claimed, and you'll see why shale gas simply cannot solve our energy problems. (emphasis added)

Third, EIA's estimates of technically recoverable shale gas resources in the United States have fallen dramatically from 827 trillion cubic feet (tcf) to 482 tcf. And, this says little about whether those resources would be economically recoverable. In any case, the previous larger estimate formed the basis for the widely refuted 100-year claim. Fourth, annual production decline rates for U.S. natural gas wells are now running about 32 percent. That means that with no drilling, production would fall by one-third over the next year. So, we now must drill furiously just to maintain, let alone grow our supplies. And, shale gas--which the EIA thinks will make up 49 percent of U.S. domestic natural gas production by 2035--shows decline rates reaching 65 percent in the first year and 80 percent by the second year. It will be difficult to drill enough wells each year to replace lost production if half of all production comes from shale gas deposits.

Regardless of what the future level of natural gas production turns out to be, if U.S. domestic gas is made available on the global market, then American consumers will be forced to bid for it against the rest of the world. Here's how that might look:

Processing plants cool natural gas to approximately -260 degrees F where it becomes a liquid. It is then loaded on liquefied natural gas (LNG) tankers which ship natural gas worldwide. Until recently, however, the United States was an importer of LNG. With the unlocking of vast deposits of shale gas, LNG import terminals have had little business. But one import terminal owner, Cheniere Energy Partners, L.P., has received approval to build an export terminal next to its import facilities. Many others hope to follow suit.

If the natural gas industry gets its way, all of us in the United States, Canada and Mexico will pay the world price for natural gas. In Asia the price has bounced between $13 and $18 this year. In Europe the price has range between $8 and $12. Both continents paid far more than $2 to $3 which those in North America have been paying this year. And, here's the key thing to remember: It won't matter whether the United States produces enough natural gas to supply all its needs. Once the North American gas market is linked to the worldwide LNG market, everyone in North America will be subject to the world price.

The United States is unlikely ever again to achieve oil production high enough to supply all its needs. The last time it did that was 1948. The EIA projects that the current miniboom in U.S. oil production will peak at 6.7 mbpd around 2020, and U.S. production will thereafter decline. While natural gas production may rise for a time, it's unlikely to rise enough to allow the country to substitute natural gas for oil in enough applications to make up for declining U.S. domestic oil production. In fact, if the skeptics are right, domestic natural gas production may never even completely cover domestic needs.

The oil and gas industry is run to serve up profit to its shareholders any way it can, not to help the United States or any country obtain energy independence. The industry is simply using the energy independence idea to get the public and policymakers to go along with increased drilling on public lands and sensitive areas as well as relaxation of environmental regulations. The industry's plan all along has been to sell any oil and gas it extracts to the highest bidder. If the industry were truly concerned about American energy independence, it wouldn't spend its time seeking permission from the federal government to ship oil and gas abroad.

We can look to Canada for an example of what happens when the oil and gas industry essentially determines energy policy. Canada produced 2.9 mbpd of crude oil in 2011. It consumed 2.3 mbpd of petroleum products. The country is the world's ninth largest exporter of crude oil and petroleum products. And yet, Canada imported 43 percent of its oil needs. That's because it's more profitable for the industry to ship Canada's oil--mostly produced in the western part of the country--south to the United States to be refined. Canada's provinces from Ontario eastward import 65 percent of their petroleum needs from overseas, meaning that a country that could easily be energy independent is subject to supply shocks from abroad.

The idea that we can ever truly achieve energy security based on commodities traded in worldwide markets is nothing but a clever deception--one designed to keep us from doing what we really need to do, namely, reduce our reliance on fossil fuels and vastly expand alternative energy production such as solar, wind and hydroelectric that cannot easily be exported across oceans.

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 writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, 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


yvesT said...

"The United States is unlikely ever again to achieve oil production high enough to supply all its needs."

It is one thing to say the above, it is another to point to key figures :

US crude production 1971 : 11 millions barrels day
Today : 5 or 6

The US passed its production peak it is a done deal.

It was also the basic reason for the first oil shock (and not the mythical "arab embargo", a non event).

What is more important than imports/exports is domestic consumption.

The only policy making sense with respect to that is volume based taxes.

This is valid in a pure "nationalistic selfish" sense.

Anonymous said...

As always, the Peak Oil message is huddled by its partisan's refusal to bring out all the facts.

The EIA recently significantly upped its estimate of U.S. oil production, specifically tight oil. You probably know that, so why did you not include that?

Second, your refusal to admit that NGPLs play a reasonable part in oil consumption(which includes heavy industry) isn't helping.

Otherwise, I'm with you on a lot of other points.

Kurt Cobb said...

Anonymous believes that I am not taking into account the latest EIA estimates. In this he is mistaken. The final 2012 Annual Energy Outlook reaffirmed EIA's projection that U.S. domestic production will have a secondary peak at 6.7 mbpd in 2020 despite growth in tight oil, and it is the total which matters when it comes to gauging the need for imports.

As for natural gas plants liquids, I detailed my objections to lumping NGPLs with oil in this piece, noting that there were some very limited direct substitutions for oil that were possible, but not enough to warrant calling NGPLs part of the "Total Oil Supply" as EIA does.

I believe NGPLs deserve component-by-component evaluations to determine how much they can be said to be a substitute for oil. I believe the analysis I provided demonstrated that the answer is "not much."

I don't dispute that NGPLs are used in many industrial processes, even some for which oil-derived analogs would be second choice were NGPLs not available. But the wholesale grouping of NGPLs with oil is unwarranted and deceptive.

marmico said...

That's because it's more profitable for the industry to ship Canada's oil...

No. It's an infrastructure issue. There is no west-east oil pipeline.

But there are plans to remedy the situation on the drawing board.

Kurt Cobb said...


I should have said that it is more profitable to ship Canada's crude south because there is no pipeline infrastructure in Canada to ship it eastward. Alternatives, such as shipping by rail, cannot compete with pipeline transport southward to the United States. I've written about this issue previously.

Thanks for the link about a project to address this problem. I think it is a much better choice for Canadians than sending their patrimony south and letting Americans benefit from all the value added by refining.

Marmico, do you think this project really has a chance of being approved and completed? Something that makes as much sense as this is bound to attract powerful opposition.