July 2014

Energy issues

Same game, different questions

William J. Pike / World Oil


In the U.S., oil production hit a 27-year high during May, increasing to 8.3 MMbpd. Natural gas output continues to rise also, topping 86 Bcfd in March, the highest U.S. gas production figure in history. This presents a conundrum to us old guys. We have to change the conversation.

You see, for the last five decades or so, we seniors have been discussing one question almost all of the time—one oil and gas question, that is. “Where are we going to find enough oil and gas?” The topic has dominated conferences, luncheon discussions, learned papers and bar talk. It has been our quest, our raison d’etre.  Now, thanks to shale, we have more oil and gas than we ever imagined we might have. And, now, the questions become, “What do we do with it? How do we find a market for it, and how do we sustain reasonable prices?”

It is not that we mind these new questions. Not in the least. In fact, we are quite proud of them, since we helped create them. It’s just that we have to come up to speed on a new topic to replace this one, and we don’t learn as fast as we used to.  But, we have a few options, which appear below as a sort of primer to the developing discussion and the primary difficulty involved.

First, we have to get it out of the domestic market or suffer an internal glut of oil and gas, and a descent into unacceptable oil and gas prices. In short, we have to export the excess. That should be easy enough, right? Sure it should be, if we had the infrastructure, if we had the will, and if we could keep politics out of it. We can build the infrastructure—we surely have the will—but the jury is out on the political hurdles.

Let’s start with the infrastructure. We need transportation to move oil and gas from the field to processing/refining points, and from there to export facilities (if they do not coexist, as they do along the Gulf Coast). That would be something like—say—the Keystone XL Pipeline. But that pipeline’s route through the U.S. is under eternal review, and its completion before we open the first McDonald’s on the moon is questionable. The current administration has been reluctant to sign off on it, for “environmental” reasons. Could it be, that there are politics involved?

Of course, we could transport more oil and gas by rail, but Washington is spooked by the tank car derailments and fatal explosions in Quebec (the tragic result of rail issues and not of the cargo), and is reluctant to support further rail transport of oil as is currently practiced, although we have an exemplary record of doing so for decades. But, that probably is not political—right?

Given that long-haul truck transport is not economic, that leaves one other option—shut it in to restrict supply and raise prices. That may not be industry’s option, but it could be a politically acceptable option.

Let’s say that, somehow, we get the oil and gas transported, processed and to an export point. At the moment, tanker movement is still the acceptable way to move oil over long stretches of water. It should be—or could be—for gas also, or so it would seem. But …

A winding way forward. With the U.S. oil and gas industry chomping at the bit to get on with LNG exports, to offload burgeoning shale gas production and stabilize prices at reasonable levels, a game of political football has emerged between the U.S. Department of Energy (DOE) and the U.S. Congress. In early June, DOE issued a Notice of Procedures (NPP) for Liquefied Natural Gas Export Decisions. The notice, which outlines proposed changes in the way LNG export permits would be issued, would result in the suspension of conditional approvals for LNG exports to non-Free Trade Agreement (FTA) countries until the completion of a full environmental review under the National Environmental Policy Act, significantly slowing the approval process.

Under DOE’s prior policy, to allow the issuance of conditional approvals for non-FTA countries, only Cheniere Energy Inc., which is building a liquefaction and export plant in Louisiana (scheduled to begin operations in 2015), has obtained all the permits necessary to export natural gas.

DOE’s reasoning for the change is that it will prioritize approval for projects that are ready to go forward, and that clearing the review process will enable better decisions to be made. And, despite reservations on many fronts, some in industry agree with DOE that higher costs up front would weed out those projects that were high on the list for conditional approval but extremely questionable in terms of actual execution capability.

Regardless of its merit, the DOE plan has suffered sharp criticism, especially from Republican leaders of the House Energy and Commerce Committee. Chairman Fred Upton and 60 co-sponsors introduced H.R. 6, the Domestic Prosperity and Global Freedom Act (really!!!) that would give a 30-day time limit (following a National Environmental Policy Act review) for a  DOE approval decision on LNG exports to any World Trade Organization country.  The U.S. House of Representatives was set to vote on H.R. 6 in the last week of June.  Democrats, needless to say, are not in accord with H.R. 6. Obviously, there are no politics here.

And there you have it. Unlike the question of where can we find, and how can we produce, the oil and gas we need, the question of what we do with the oil and gas that we produce is clear-cut. You don’t have to agonize over it—just ask a politician, and be sure to use all of the acronyms. wo-box_blue.gif

About the Authors
William J. Pike
World Oil
William J. Pike has 47 years’ experience in the upstream oil and gas industry, and serves as Chairman of the World Oil Editorial Advisory Board.
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