President Obama continues to talk about U.S. energy independence while the U.S. fossil fuel industry continues to eye global energy markets for export instead.
Both can happen, but marrying the two themes could become a challenge for the president in his second term; his policies and increased scrutiny of fossil fuels in his first term has made it unattractive for U.S. energy companies to supply the U.S. market.
Exporting is a way for companies to circumvent U.S. regulation and make more money.
Independence—How is it possible?
The U.S. imports only 20 percent of its energy. But, the International Energy Association says the country could become “energy self-sufficient” by 2035.
According to IEA’s World Energy Outlook 2012, the world will continue to rely on fossil fuels for transportation and electric generation, courted by subsidies to the tune of $523 billion in 2011, up 30 percent over 2010 and six times what renewables receive globally.
To boot, the U.S. will continue to import 3.4 million barrels of day of crude.
But, the increase in U.S. unconventional drilling for natural gas and oil from shale resources will improve the U.S. trade balance, notwithstanding U.S. legislation or regulation to thwart exports.
IEA says global energy demand will grow by more than one-third now until 2035 with most of that growth in China, India and the Middle East—about 60 percent—with an interest in natural gas.
While the market is open for all global suppliers, the U.S. fossil fuel industry, hammered by environmental regulations or impending ones, are looking for ways to circumvent its realities and make a profit.
Branko Terzic, executive director of Deloitte Center for Energy Solutions says, it’s about finding a market, anywhere.
The U.S. coal industry is already a net exporter because the U.S. has 28 percent of the world’s coal deposits.
Coal, for example, produced 20 percent of the nation’s total energy in 2011. Most of that went to U.S. electric generation, about 50 percent.
But, that picture has changed over the past year for the U.S. coal industry.
A Bleak Future for U.S. Coal
The Obama administration’s Environmental Protection Agency has emerged with four separate regulations on power generation–Cross-State Air Pollution Rule, Mercury and Air Toxics Standards, Coal Combustion Residuals and 316 (b) regulations.
And, the U.S. coal industry is already feeling suffocated.
- Peabody Energy is the largest U.S. coal company. According to Seeking Alpha, Peabody says U.S. coal demand will fall by about 10 percent this year, and utilities are already canceling coal deliveries because existing hefty stockpiles of unused coal. Luckily, Peabody has mines in Australia, and the company has been in talks with Coal India Limited to supply the country for its expanding electric generation.
- Arch Coal is the country’s second largest coal company. According to Seeking Alpha, during fiscal year 2012, Arch Coal’s profitability has declined sharply. Although sales remain flat, $523 million in mine closing costs have contributed to $390 million in losses over the past nine months. Arch Coal’s two major markets are the U.S. and Europe. Unfortunately for Arch Coal, giants like BHP Billiton, with mines in Indonesia and Australia, can more easily capture emerging markets like China because of the shipping advantage. For 2011, Arch reported $61 million in Asian revenue out of $4.3 billion in total sales.
- U.S. coal company, Alpha Natural Resources, which acquired coal giant, Massey Energy Inc. for $7.1 billion in 2011, saw a first quarter loss in 2012 of $18 million, down from a year-ago profit of $49 million.
The National Mining Association says the U.S. has a 235-year supply at current consumption. And, emerging economies like India and China are standing by for U.S. coal.
World coal demand is driven primarily by China and India, which together have built more than 800 new coal-fired electrical power plants in the past six years, with China averaging two new plants each week, he said.
Here at home, about 69,000 megawatts of coal-fueled electricity generation is expected to shut down because of the EPA pollution regulations in the U.S.
While American coal is certainly heading to emerging markets in small quantities, another pitfall for the U.S. coal industry could be the growing environmental opposition to export terminals.
The pitfalls for coal can be opportunities for U.S. natural gas, however.
Fracking Natural Gas
According to the IEA, natural gas becomes a growing resource worldwide, especially with advancements in horizontal drilling—hydraulic fracturing. That’s good news for U.S. producers suffering losses from the low price of natural gas.
During the summer of 2012, natural gas surpassed coal as the primary fuel for power generation for the first time ever.
Natural gas prices are at their lowest level in two decades. Last spring, the price of natural gas dipped to $2 mMBTU.
Additionally, unusually mild seasons over the past two years have left natural gas storage units full. The supply is forcing some smaller natural gas producers out of the market altogether. At $2 mMBTU, for some, it doesn’t make economic sense to drill for more gas. Meanwhile, countries in Asia paying upwards of $14 mMBTU for their gas, makes Asia fertile ground for the relatively low-priced U.S. supply.
U.S. natural gas is not traded on any world market, so it avoids the volatility that drives up prices elsewhere. Therein lies the opportunity for U.S. producers—selling the gas to Asia and Europe for both transportation and electric generation.
The LNG Question
Enter Cheniere. In President Obama’s first term, Cheniere ran the gauntlet of applications and approvals, raised money and broke ground on the first LNG terminal expected to ship out 2.2 billion cubic feet of natural gas/per day during the president’s second term.
The United States already exports relatively meager quantities of natural gas, mostly via pipeline; about 6 percent of total produced gas is exported.
As of November 8, 2012, one of 19 applications for broad export had been approved—Cheniere Energy Inc.’s application for Sabine Pass in western Cameron Parish, Louisiana. Only 16 of the 19 have been approved to export to countries with which the U.S. has a free trade agreement.
A number of hurdles could thwart profitable export of natural gas from the U.S., one of which could be a long-awaited report from DOE on the impact that natural gas exports will have on the U.S. natural gas sector and the U.S. economy.
The report is expected in December or January. It was expected this fall. DOE said it would not approve any additional LNG applications until it finished the comprehensive review of the exports’ impact.
Is Oil the Key?
As resources leave our shores and potentially raise prices here, can the U.S. become energy independent or “self-sufficient,”?
It’s possible. While the EPA continues to scrutinize unconventional natural gas development, the White House continues to outwardly support drilling.
And, despite the president’s re-election and an expected reduction in oil exploration and drilling, 2013 promises to yield more in oil resources. The president promises to open up the Gulf of Mexico for deepwater drilling for the first time since the BP oil spill in 2010.
In 2012, Interior issued 78 exploration drilling permits and 36 development drilling permits. This sets up the industry well for its 2013 drilling season.
Spending in the Gulf of Mexico is expected to be up nearly 30 percent–$40 billion. Total expenditures on Gulf drilling for most of the president’s second term are expected to reach $167 billion in the 2013 to 2016 period.
“On a total energy basis, we’re 83 percent domestic energy,” Terzic of Deloitte says. “We’re only talking about oil. We’re not talking about coal or natural gas [because] we don’t import those.”
Terzic says, “We can become supply independent [with oil], but we won’t become price independent. As long as we allow domestic oil to be priced at global prices, any time there’s a crisis in a global region, it’ll cost us.”