The U.S. Energy Renaissance and Exports
Center for Strategic and International Studies (CSIS)
Center for Strategic and International Studies (CSIS)
It's an honor being here to speak with you today. It's a great opportunity to talk about some of the energy policy issues coming as a result of the energy renaissance we are seeing here in the U.S. So this is an important time for our country.
In the energy business, we truly do have a renaissance underway. And we can view it from four perspectives. First, it's a technology story. Second, a natural gas story. Next, an oil story. And now, an exports story. This entails policy decisions we need to start grappling with as a country.
None of this seemed possible back in the 1970s. We had energy shortages. The oil embargo. Gasoline lines. Factories and even schools closed for lack of heat for their buildings. And rising import dependence. Government responded with policies intended to protect consumers. Some worked. Some didn't. For example, price controls cut domestic supplies. So they created shortages back then. For the next three decades, we saw both industry upturns and downturns similar to what we're seeing today. But not much progress in the overall energy balance.
Today, we've reversed our fortunes. The U.S. has reassumed leadership in the energy arena. We're passing Russia as the world's number one producer when you combine oil and gas together. Production is climbing. Oil imports are falling. We now have a century's supply of natural gas in the U.S. LNG imports have nearly ended. Multiple states and even regions are booming from energy development. Jobs have been created by the hundreds of thousands in the oil patch across all the regions of the U.S. and many of these are outside the traditional producing areas. Oil and natural gas now support 9.8 million U.S. jobs. And they contribute 8% of our GDP.
I think you've all heard this story. It started with home-grown technology. Hydraulic fracturing – which originated back in the 1940s. Horizontal drilling – which came along in the 1980s. And combining the two on shale rock – starting in the late 1990s.
By the mid-2000s, we had cracked the code in this business. New production revived the natural gas industry. Then the renaissance spread to liquids. And there were other innovations in our business. We developed production from the deepwater Gulf of Mexico, and the Canadian oil sands, our neighbor to the north. We also applied new technology to older onshore fields.
So today finds us in a uniquely advantageous situation. We and Canada have far greater supply security. Low-cost natural gas is reviving our manufacturing industries. They're building new facilities by the hundreds. Even foreign-based companies are coming here to build. They'd rather build here instead of back home because of our low energy costs. And affordable energy has helped drive the U.S. economic rebound.
We do face challenges – but not from shale's staying power. We've really just scratched the surface of its potential. Most of our new production comes from just a handful of giant fields. You've heard some of the names. In Texas – the Eagle Ford, Permian and Barnett. In North Dakota – the Bakken. Up here in the Northeast – the Marcellus. But they hold enormous amounts of hydrocarbons – tens of billions of equivalent barrels each. And our recovery factors are rising – which is how much we get out of the ground. That's thanks to closer well density and better science around hydraulic fracturing. In the best areas, we're finding "pay" zones up to hundreds of feet thick. And sometimes multiple zones are stacked on top of each other. So we're climbing the learning curve on shale production, and getting more efficient all the time. Meanwhile, several dozen potentially productive trends in the U.S. and Canada we haven't even fully exploited yet. So the message is, we are in the first inning of a nine-inning game.
Natural gas is nearly in surplus in North America. We plan to export some of it as LNG – liquefied natural gas. It's wanted worldwide for the environmental and climate benefits. Also for supply security. By 2016 – just next year – the U.S. will be positioned to become a net LNG exporter.
This is really viewed favorably overseas as other countries contemplate this new paradigm in the U.S. Our natural gas prices have been half those in Europe. And a third of those in Asia. Spreads have in fact eroded a little lately. And the cost to liquefy and ship gas will take up some of the remaining difference. But our LNG is going to be competitive overseas. Our abundance can accommodate both exports as well as domestic consumption here in the United States. The exports aren't going to drain our surplus.
There may be some limiting factors, like competition from the Middle East, Australia and the Asia Pacific. Also, it's going to cost $6-to-$7 per million Btus to liquefy and ship this LNG to our customers. But that means U.S. consumers will still have a built-in advantage.
We do have plenty of supply to satisfy both U.S. consumers as well as exports. The DOE has studied this and approved projects with 10 billion cubic feet per day of export volumes. That's only 10-to-15% of our current consumption. And they've examined the results of exporting higher daily volumes – up to 20 BCF, although they deem these levels unlikely. But they still studied it and found that U.S. consumers would still have plenty of natural gas.
In return, we'd see meaningful benefits. Exports would create new markets for domestic production. Prices to producers would rise a little – by 4-to-11% -- which is good. We'd have more money to reinvest into development of more gas production. This would create jobs and economic stimulation. And the balance of trade would improve.
There's more. NERA did a study for DOE. It predicts that GDP would rise $5-to-$50 billion thru exports. The exact amount depends on actual production and export levels. So I think you'll agree that exports in general are vital to the economy. The U.S. is the world's 2nd-leading product exporter. Products and services together generated $2.3 trillion from exports in 2013. Or 1/7th of our GDP.
The next aspect of the renaissance is that it's moved into oil and liquids. With natural gas approaching surplus, development has slowed down, waiting on more demand and exports. So instead the industry has turned to development of liquids. But we're approaching a surplus there too.
I'll give you some numbers. In 1970 we U.S. oil production peaked at about 11 million barrels per day (MMBD). Then it fell for more than 30 years. It bottomed at 7 million a day in 2009. But now we've climbed back up in just that short period time to above 10 MMBD – and growing. DOE predicts 12 million a day in 2020. And their high-resource case predicts 18 by 2040.
At the same time, Canada has made progress. They're producing 4 MMBD now. That could be up 50 percent by 2030. This oil is right next door – in a friendly, reliable country. It's the world's third-largest oil resource. And we in the U.S. are the logical market.
Meanwhile, U.S. demand is flat. We've mandated use of renewable fuel. And we're building and running more efficient cars and trucks. As you know, we still import some oil. But U.S. and Canadian production together are climbing. They're approaching total demand, and will exceed it in the very near future. So we and Canada together can become net exporters by 2020. So you might say, what about low oil prices today? Low oil prices will affect investment and it might take a little longer. But that's the trajectory we're headed on here in North America.
As for the crude oil market, for efficiency it should involve both imports and exports. I know that's counterintuitive. But I'll give you the underlying facts.
Shale rock – this revolution we're undergoing in the U.S. – produces condensate and what we call "light" oil. This is light sweet crude that doesn't have a lot of impurities. It's very different from "heavy" oil – the kind that comes from Mexico, Venezuela and Canada. That oil has higher sulfur content and it takes more to refine it. These two varieties – light and heavy – require different refining equipment.
Light oil isn't a good match for our Gulf Coast refineries, or some of our East Coast refineries as well. They were configured years ago to run heavy oil from Venezuela and Mexico. To process more of the light oil we're developing in the unconventional plays, they may have to operate inefficiently, or run at reduced rates. So to make sense for them, light oil must come at a big discount to offset the higher processing cost. IHS and others have studied this issue. They've found that the discount could be as much as $10-to-$25-per-barrel. That's a pretty significant discount in order to incentive these refiners to take the light crude. It becomes a pretty big hit to the producing side of the business. It cuts their ability to invest in new production.
Crunch time is coming fast. Light oil production already exceeds refining capacity seasonally. Such as during the fall and spring when refiners go into maintenance turnarounds. At these times they can't take all of our current light oil production. That seasonal surplus will become a year-round annual surplus starting in 2017, and certainly beyond.
What could the refiners do? They could invest more money to expand their capacity to take this light crude. But that would cost them roughly $400 million per plant. That could be a challenge. They're already making investments to meet tougher gasoline specifications. And getting air permits could be very difficult.
So we need to talk about this issue today -- now. We already have the seasonal surpluses. The 2017 threshold is only two years away. And the estimates are that by 2020, we'll need to export 1.5-to-2 million barrels of crude oil a day. Otherwise, we'll face a threat to this development and renaissance we're seeing in the U.S.
At the same time, our country needs these energy industry jobs and economic stimulation. They've been good for the country. But there's a perfect storm of converging threats. First, the depressed U.S. natural gas market. The LNG exports will help that. Second, the discount on domestic light oil. And third, the world oil price downturn we're currently experiencing.
That downturn will probably have an impact. U.S. light oil production was up 1 MMBD just last year. Some predict that growth will slow to about 700,000 barrels a day this year, and a bit less the year beyond that. Many of the planned light oil projects are break-even at $70. They start becoming uneconomic at various prices below that. The vast majority are probably uneconomic below prices of $40.
So you can see the danger of having a discount below the WTI price – which is what we are paid for oil here in the U.S. That price today ranges from $45 to $50 per barrel. The discount worsens the impact of the supply bubble. So fewer projects will break even. And cash flow available for reinvestment will fall. We'd also be disadvantaged competitively vs. foreign producers. More drilling rigs would be laid down. More jobs lost. And U.S. economic stimulation would start to be reduced.
So this price challenge won't stop all the activity because some of the better areas in the shale remain economic. The resources are there. We have rising ability to produce from shale. And the economics will improve some as new innovations take hold.
Our growth will slow down – but not stop. And that's important – it won't stop. We've changed the structural situation for the U.S. oil and natural gas outlook as we've gotten more efficient and better at producing from unconventional sources like shale.
But what the reduced activity levels will do is cause impacts not just to our industry, but to the U.S. in general.
There is a solution – one with several parts. First, the heavy oil issue. Traditional supplies are falling in Mexico and Venezuela. But the Canadian oil sands can replace them. That is, if Gulf Coast refiners can get this oil economically. Approving the Keystone XL pipeline is a vital piece to that. Otherwise, this oil will move by rail – which is more expensive.
Second, we should start exporting our surplus oil. This is the oil that our refineries can't process economically today. But there's a roadblock – federal law. Since 1975, the Energy Policy and Conservation Act has prohibited crude oil exports. There are only a few exceptions allowed now. Like for small amounts of oil going to Canada. Or oil from Alaska. But this ban is out of date. Times have changed – and for the better. It's a new world we live in today, so policy should change as well. Government can and should address this issue. It should allow broader crude oil exports. This could be done through either executive or legislative action. But something must be done.
Otherwise – in today's low-oil-price environment – we'll lose even more potential production growth down the road. So we should take action. And we should do it before we cross the year-round threshold. And before the 2016 election cycle. Otherwise it will certainly complicate the discussion politically.
We should treat crude oil just like any other potential export product that we have in the U.S. today. As you know, U.S. participation in trade is vital to exercising global leadership. Even now we're seeking global trade in the TPP negotiations with Asia. Also in the TTIP negotiations with Europe. We should adopt that same philosophy on oil. We should open the market to normal trade flows. We do it for all the other products we produce as a country.
By the way, the third-largest U.S. export by dollar volume is oil products, like gasoline and diesel fuel. They can be exported legally. But not the crude oil that makes and generates the gasoline and diesel fuel.
We have had a little progress. The Administration now considers natural gas liquids – and some processed condensate – as products. So they can be exported. It's certainly a step in the right direction. But it doesn't provide the relief needed. It's targeting a very small part of production in the U.S.
We should repeal the crude oil export ban. We shouldn't treat crude oil differently from its products. Or differently from natural gas. They're all just commodity energy sources. They can be traded profitably to benefit the United States.
Several studies have looked at those benefits. Brookings predicts U.S. production would rise by up to 3 million barrels a day by repeal of the export ban. Jobs would be created. Income would be generated for the service, supply and support industries. And household income would grow.
IHS tells us that the industry could make $750 billion in added investments thru 2030. That's certainly a lot of stimulus. Annual GDP would gain $135 billion at the peak. We'd add a million more direct and indirect supply-chain jobs, also at the peak. And our trade balance would improve by $67 billion annually.
Government would also benefit. It would gain $1.3 trillion in higher tax and royalty revenue thru 2030. That's split between federal, state and local government. So everybody wins.
And consumers win. They'd get lower gasoline prices. I know that seems counter-intuitive – export oil to get lower gasoline prices. But when world oil prices come down, fuel prices come down. That's true worldwide and in the U.S. The discounted light oil in the past has not led to lower gasoline prices because it has not had the opportunity to get into the global market and reduce the global price of oil. So by adding our exports to that global market, we'd help reduce fuel prices.
Studies by government, think tanks and energy consultancies agree on some or most of this. They include the Brookings Institution. Resources for the Future. The Federal Reserve Bank of Dallas. IHS. EIA. And ICF. As for savings on gasoline, IHS estimates $18 billion annually. Or 9-to-12 cents per gallon, according to Brookings.
There'd also be geopolitical benefits. We could help stabilize the global oil market's ups and downs. We've already seen it happen. Our new light oil production has added 3 million barrels a day, which had backed out that much in imports. That's about the same amount of production lost due to geopolitical events in the Mid-East and North Africa. Places like Libya, Iraq and Iran.
So as a country we added 3 MMBD in light sweet oil, backed out imports, stabilized the global market, and offset the loss of production from other countries. Some estimates will tell you that if we hadn't had that 3 MMBD coming from the U.S., all else being equal, Brent prices would have been $12-to-$40 per barrel higher. That's according to ICF.
But once we finish backing out all the imports of light oil our refineries need, our influence will start to decline. There will be no light oil imports left to back out. But through oil exports, we could maintain our influence and help make up for production lost elsewhere. Exports would diversify the supply base. And they'd create a more competitive market.
Crude oil exports would demonstrate our commitment to free and open markets. After all, other countries have goods we need. We expect them to export to us. And they want access to our surplus light oil, and certainty this would enhance our foreign policy leverage. For example, we could provide more supply security to the world. And certainly the countries that need oil want access to U.S. supplies.
Exports would shift revenue to the U.S. and away from less-reliable suppliers. And they would enhance the economic power that underlies our global influence. Again, we'd be exporting high-value light oil. While importing lower-value, lower-quality heavy oil.
But keep in mind – we'd only export our surplus oil. U.S. refiners would still have as much light oil as they need to run their refineries. They'd still have a competitive advantage over foreign refiners, because it would cost $2-to-$6 per barrel to export U.S. oil to other locations. Foreign refiners would have to pay that. We're only talking about the surplus we have today, and the growing surplus we'll have in the future.
And U.S. refiners would still have another built-in advantage relative to foreign competition – the low-cost natural gas prices that have also come from this energy renaissance. We've flattened the price curve on natural gas, and as a result any U.S. manufacturing industry that relies on energy as an important part of their cost structure is certainly more competitive in the global market today.
In closing, we have a big job ahead to convince policymakers and the public on this important issue. We first have to change the mind-set of scarcity. That's a hold-over from the last century. Memories last a long time.
But today's U.S. energy renaissance is real, it's here today and it's here for the long term. It won't come and go quickly. It can continue to serve as an engine of U.S. economic growth. And we can help ensure that by recognizing the new realities – and allowing oil exports.
I hope you'll join us in telling that story.