Energy Security: Oil Independence A Long Ways Off – 2/3/17

U.S. Presidents pledging to make America independent from OPEC oil isn’t new. Energy security has always been a concern for nations, and reliance on imported oil from unstable regions has caused serious problems in recent times. Problems which lead to George W. Bush’s attempts to reduce imports from the Middle East saying the nation was “addicted to oil”, but vowing and doing are very different things. In the end, oil shipments from OPEC to the U.S. rose more than 10% during Bush’s time in office.

Independence from the Middle East would equate to replacing about 2.7 million barrels a day (b/d) in net imports, a 30% increase in current domestic output — currently ~9 million b/d after the already massive increase following the shale drilling and fracking boom.

Still, the new goal is more obtainable than it once was. U.S. oil production has risen significantly in the last decade, so the nation was nearing energy independence even without prompting from the White House.

And shale explorers in the United States are expected to increase spending four times faster than the global average this year. According to Bloomberg, the number of rigs drilling for oil and gas in the U.S. and Canada has more than doubled since May.

As to when the U.S. reach some degree of energy independence, the EIA’s January Short-Term Energy Outlook could hold some clues.

The EIA forecasts an increase in U.S. crude oil production from an average of 8.9 million barrels per day (b/d) in 2016 to an average of 9.3 million b/d in 2018, primarily thanks to U.S. tight oil production in Texas from the Permian and Eagle Ford regions.

Although overall U.S. oil production has been declining since mid-2015, the EIA has observed increasing production in the Permian region. In 2016, Permian production averaged 2.0 million b/d, a 5% increase from 2015. Permian production is projected to average 2.3 million b/d in 2017 and 2.5 million b/d in 2018.

Compared with the Permian region, other regions have fared poorly. The next most successful region, Eagle Ford, saw declines with average annual production at 1.6 million b/d in 2015 and 1.3 million b/d in 2016. The EIA expects production in that region will only begin increasing again in the third quarter of 2017 amid higher oil prices.

Clearly a 0.4 million b/d increase in domestic production isn’t enough to make up for the 2.7 million b/d in imports from OPEC nations, but it is decent progress for two years.

Still, U.S. tight oil is relatively costly to pull out of the ground with even the best U.S. shale plays producing at break-even costs near $35.

The problem with just pumping more oil to reach energy independence is that increasing supplies by a couple million barrels per day would drive down prices. And compared to OPEC nations that can break-even selling at prices below $25 a barrel, no shale driller could operate profitably under the prices declines that large a difference in supply and demand would cause.

U.S. shale drillers may be extremely important as marginal producers, but unless OPEC imports are banned entirely, U.S. tight oil output will inevitably decline like it did over the last two years. Even in that unlikely even, a shift away from OPEC would probably do more to benefit Canada and Mexico than the U.S. The two countries supply 40% and 8% of all U.S. imports of petroleum, respectively.

The Kemper Project: Clean-Coal Gone Awry – 2/1/17

Southern Co.’s “clean-coal” plant in Kemper County, Mississippi has been hailed as a first-of-its-kind project; it could also be the last.

After running more than two years behind schedule and $4 billion over its original $2.88 billion budget, the Kemper project was already hard to call a success. That difficulty becomes nearly insurmountable when you add a number of cheaper, cleaner alternatives to coal and a climate change skeptic in the White House.

The Kemper project began around 2008 when many believed that natural gas would soon become scarce. Shortly after, hydraulic fracturing applied to shales in the United States unlocked so much natural gas that the U.S. soon became a net exporter of the fuel.

And with skyrocketing supplies came plummeting prices.

In a matter of years, natural gas became a much better bet than coal.

Emissions related to combusting coal (206 to 229 lbs CO2/MMBtu) are also higher than those associated with combusting natural gas (117 lbs CO2/MMBtu), according to the EIAA cleaner burn makes natural gas more palatable for environmentalists and helps insulate it from future regulation of emissions. Such qualities are a must for new power plants which have lifetimes measured in decades and must remain profitable through multiple presidential and Congressional administrations.

Kemper was supposed to show how coal could be “clean”, but utilities have to make money too and Kemper only showed how far away carbon capture technology is from matching up to other available options.

On the regulatory side of things, the Trump administration’s committment to clean-coal technology and reviving America’s coal industry seems like a lucky break for the Kemper project. However, promises to roll back energy regulations hold their own problems.

Trump’s antipathy toward the Clean Power Plan would make the financial justification for clean coal an even tougher sell, said Christine Tezak, a managing director at Washington-based ClearView Energy Partners.

“The economics are incredibly disadvantageous,” Tezak said.

Once the government is no longer pushing for lower emissions, the Kemper project loses one of the few justifications for existing, or at least appears to, making it harder to build support.

On top of its economic and regulatory problems, the Kemper facility remains in a tricky legal situation as well. Oil producer, Treetop Midstream Services LLC, is suing for $100 million because of a canceled CO2 supply contract and customers are alleging Southern failed to fully disclose facts related to the plant’s cost. An institutional investor filed suit against Southern on Jan. 23, accusing the company of giving false information about the project.

Southern recently told state regulators that the five-year operating and maintenance costs of the facility have nearly quadrupled to about $1 billion from the original estimate, according to a regulatory filing. When some of those costs are passed along to ratepayers, as they inevitably will be, the project will grow harder and harder to defend.

EIA Annual Energy Outlook for 2017: Summary and Thoughts – 1/31/17

The EIA has released its annual energy outlook for 2017 so here is the short version with some additional analysis.

For starters, the EIA sees no growth for nuclear power industry. Nuclear generation is expected to decline slowly from now through 2040 as units are retired and relatively little new nuclear capacity comes online.

In contrast, EIA’s assessment of the renewable sector shows strong growth. From 612 billion kwh in 2016, renewable generation is expected to climb to 1,212 billion kwh by 2040.

The third major finding in EIA’s analysis has coal generation moving little from its initial 1,232 billion kwh, reaching 1,400 billion kwh in the late 2020s before falling back to 1,390 billion kwh in 2040. Overall, coal’s share of the electric generation market would decline from 30.3% to an estimated 27.8% of annual generation.

Keep in mind that the EIA projections do not reflect the possibility of future regulations such as the now assumed defunct Clean Power Plan. Should another administration or even a number of state governments implement emission reduction targets then coal share would drop relative to other power sources. The federal government has never set a comprehensive national energy policy anyways whereas many states have their own policies planned or in place making this a real possibility.

The EIA previously released data on the LCOE for new generation resources projected for 2020 which helps to explain some of its conclusions in the 2017 Outlook.

(click image to enlarge)

For context:

Fracking and horizontal-drilling capabilities have vastly lowered the cost of natural gas as reflected in the table above.

Prices for solar power modules have fallen 70% in the past six years.

Wind power costs have dropped 58% in the past five years.

Battery prices, which are seen as complementary to intermittent power sources like wind and solar, have also fallen approximately 14% annually since 2007.

Coal on the Decline in the U.S. and China – 1/30/17

China and the U.S. are the first and second largest consumers of coal in the world, respectively. And though the governments of each nation are regarding the resource very differently for 2017, it doesn’t have much of a future in either.

China will invest $361 billion over the next three years in renewable power generation, while also canceling plans to build 103 coal-fired power plants, its National Energy Administration recently announced. If the Chinese government follows through on the plan, then it would mean stopping the addition of 120 GW of capacity, including projects already under construction.

The cancellations are in line with China’s goal of limiting its total coal-fired power generation capacity to 1,100 GW by 2020. Under the promise of reducing air pollution and greenhouse gas emission, coal use has been on the decline in China since 2013 and cleaner sources of power have account for a larger share of new additions each year.

Still, implementing the cuts could prove difficult. China is building more capacity than it needs for a number of reasons including the fact that power plant projects are popular way for local governments to raise tax revenue and employ citizens. It is unclear if local officials will play along with canceling contracts when the political cost of doing so is high. Unfortunately for those officials, the directive names each project set for cancellation, so they are likely to face heavy pressure to comply.

In the U.S., coal is under also under threat, though for different reasons. Despite, promises to revive the industry from the executive branch, coal’s share of American electricity generation peaked long ago and all signs point to further decline.

Natural gas alone has devastated coal’s share of energy consumption. Even before the massive shale gas deposits came into play with the rise of fracking, natural gas was a competitive threat. Nowadays, between the low cost of gas and its relatively clean burn, coal can’t even compete with another fossil fuel, let alone renewables with fast-falling costs and popular support.

Fewer than 60,000 Americans now make their living mining while clean energy employs at least 2.5 million Americans.

On top of that, nearly half of American output is produced by companies in bankruptcy.

And utilities in the United States have only four coal-fired plants set to go online through 2020, with a combined capacity of less than 1 GW, according to the U.S. Energy Information Administration. For comparison, more than 13 GW of coal-fired capacity was retired in 2015.

Be it in China or the U.S., with or without government support, coal is set for continued decline for the foreseeable future.

India: A Rising Star in Solar Power – 1/27/17

Falling costs and competition among developers are sending solar power prices plummeting around the world, but solar’s success in 2017 could depend heavily on one nation: India.

As the second most populous nation and one of fastest growing economies in the world, India is set to invest heavily in electricity generation — something that will conflict with its air pollution reduction goals unless it uses more non-coal fuel sources. To solve the issue, India adopted auctions in 2010 to help achieve Prime Minister Narendra Modi’s solar target of 100 GW of capacity by 2022.

In 2016, both Chile and the United Arab Emirates used auctions to develop solar projects for less than half the 6 cents a kilowatt-hour average global cost of coal power. Fortunately, the price paid for solar power at auction in India is following the same trend, according to Bloomberg data.

India is also expected to add nearly twice as much new solar as last year, according to forecasts by Bloomberg New Energy Finance.

The most conservative estimate from the forecasts put India’s solar additions at about 8.9 GW of new capacity in 2017, nearly twice the 4.5 GW last year.

The rapidly falling prices are made possible by the consistent decline in costs associated with manufacturing. Silicon modules used in solar panels are were 30% cheaper in 2016 than the year before, and prices are expected to fall another 20% in 2017, according to London-based BNEF. With the expectation of further cost declines, developers have been willing to cut prices below costs for the sake of securing contracts.

EIA: Natural Gas Fuels Cleaner Power Sector – 1/26/17

Full EIA articles on natural gas and its effect on the power sector: first, second

For the first time since the late 1970s, U.S. CO2 emissions from the transportation sector exceeded electric power sector CO2 emissions on a 12-month rolling total basis, measured from October 2015 through September 2016. Electric power sector emissions are now regularly below those of the transportation sector  despite making up a larger share of total U.S. energy consumption.

The reason for this is a significant decline in carbon intensity for the power sector as natural gas replaces coal as the preferred fuel of electricity generators. On average, emissions associated with combusting coal (~206 to 229 lbs CO2/MMBtu) are higher than those associated with combusting natural gas (~117 lbs CO2/MMBtu). Natural gas electric generators also tend to be more efficient than coal generators, because they require less fuel to generate the same output.

In the 12 months from October 2015 through September 2016, coal and gas accounted for 31% and 34% of electric power generation, respectively. However, their shares of electric power sector emissions were 61% and 31%, respectively, as coal is much more carbon-intensive. Overall power sector carbon intensity has also decreased as generation share of fuels such as wind and solar has grown.

Emissions from the transportation sector are primarily from fuels which have carbon intensities lower than coal but higher than natural gas. For example, gasoline emits an average of 157 lbs of CO2/MMBtu. In the months observed, motor gasoline represented 60% of the total emissions from the transportation sector, while 23% was from distillate fuel oil and 12% was from jet fuel.


Falling prices for natural gas have helped fuel the shift from coal to natural gas in the power sector.

Natural gas spot prices in 2016 averaged $2.49 per million British thermal units (MMBtu) at the national benchmark Henry Hub, the lowest annual average price since 1999. Warmer-than-normal temperatures for most of the year and changing natural gas demand were the main drivers of natural gas prices in 2016.

In the first quarter of the year, much warmer-than-normal winter temperatures and large amounts of natural gas in storage caused prices to decrease. Prices began to gradually increase in late spring, with increasing demand and decreasing production, before sharply increasing at the end of the year with the onset of cold temperatures in mid-December.

Because of warm weather, natural gas consumption in the residential and commercial sectors in 2016 declined 7% and 4%, respectively, from the previous year. As a result, natural gas storage inventories were at or near record levels throughout most of the year.

In November 2016, the United States became a net exporter of natural gas on a monthly basis for the first time since 1957, based on data from PointLogic.

U.S. pipeline exports to Mexico continued to grow throughout 2016, making up 87% of all U.S. natural gas exports and, in May 2016, the Sabine Pass terminal began commercial operations in the Gulf Coast to export liquefied natural gas.

Despite growing demand, low prices resulted in lower natural gas production in 2016. Based on preliminary data, the EIA estimates natural gas marketed production to face its first annual decline since 2005. The number of active natural gas drill rigs is down 19% from the year-ago count, however, production has not fallen as sharply as the number of active rigs, as producers have continued to make gains in drilling efficiency.

Green Businesses – 1/25/17

The markets decide risk and return, not the federal government. That’s good news for businesses still interested in going green.

More than 530 companies and 100 investors signed the Low Carbon USA letter to support policies to curb climate change, invest in the low carbon economy, and continue U.S. participation in the Paris Agreement.

“All parts of society have a role to play in tackling climate change, but policy and business leadership is crucial,” said Lars Petersson, president of IKEA U.S. “The Paris Agreement was a bold step towards a cleaner, brighter future, and must be protected.”

The list of signatories to the Low Carbon USA letter has doubled since November, and includes DuPont USA, General Mills, HP Enterprises, Pacific Gas & Electric, Salesforce.com, Unilever, and more.

In recent decades, global economic development has increasingly been impacted by sustainability considerations. Be it legislation or consumer demand, companies are acting more and more with the environment in mind.

  • Investors controlling more than $5 trillion in assets have committed to dropping fossil fuel stocks from their portfolios, according to a new report on the trend.
  • Climate change criteria shape the investment of $1.42 trillion in assets under management, a more than fivefold increase since 2014.
  • Microsoft-founder Bill Gates and over two dozen other business leaders launched a $1-billion fund to finance energy innovations.
  • Google has pledged to operate on 100% renewable energy in 2017.
  • Microsoft announced a massive wind power purchase agreement in a deal to buy 237MW of capacity from projects in Wyoming and Kansas.
  • Smithfield Farms, the largest pork producer in the world, promised to reduce greenhouse gas emissions 25% by 2025.
  • Walmart has committed to removing a gigaton of emissions from its global supply chain by 2030.
  • Over 2.5 million Americans now work in the clean energy industry, making above average wages.

Prices are dropping, making green power sources like solar and wind competitive even without subsidiesSolar energy is already the lowest-cost option in some parts of the world and expected to offer a better global average return on investment than coal by 2025.

Risks associated with stranded assets and weak future performance are also steering investors away from fossil fuels, especially coal, and towards green investments.

Funding coal mining operations in the U.S. is only becoming harder as credit ratings for coal companies deteriorate. Credit downgrades have outnumbered upgrades among coal mining companies this year by about eight to one, Bloomberg data show.

Climate Change Talk Fills the Room at Davos – 1/24/17

Despite the shift in political weather in Washington, the captains of business and finance gathered in Davos are talking a lot about climate change.

The World Economic Forum is devoting 15 sessions of its 2017 annual meeting to climate change, and nine more to clean energy.

“The good thing is that the Paris agreement raised the bar for everyone,” said Ben van Beurden, the head of Royal Dutch Shell Plc, Europe’s largest oil group. “Everybody feels the obligation to act.”

Achieving the ambitions set out in Paris may require $13.5 trillion of spending through to 2030, according International Energy Agency (IEA) data that show the scale of the opportunity for business. Only last year, clean energy investment stood at $287.5 billion, data compiled by Bloomberg New Energy Finance indicate.

“The scale and scope of the investment flows on renewables shows it’s mainstream,” said David Turk, head of climate change at the IEA in Paris and a former senior U.S. climate diplomat.

A survey of 750 participants at this year’s meeting shows that extreme weather is considered the biggest global risk, outstripping migrations, natural catastrophe and terrorism.

In November’s follow-up meeting to the Paris agreement, nearly 200 nations, including China, vowed to step up their efforts to fight global warming.

China, which historically fought against climate change efforts, is now pushing the importance of the issue.

Chinese President Xi Jinping urged the U.S. to remain in the “hard won” Paris agreement during a Davos speech that touted the world’s largest polluter as a leader in the fight against global warming.

“Walking away” from the pact would endanger future generations, he said.

Earlier this month, China pledged to invest 2.5 trillion yuan ($360 billion) in renewable energy through 2020 to reduce greenhouse gases that cause global warming and China’s government has recently suspended 101 coal-power projects across 11 provinces as it moves toward cutting CO2 emissions.

China already spent almost $88 billion in 2016, according to Bloomberg New Energy Finance, about a third more than the U.S. And China’s investment has already created 3.5 million renewable energy jobs that could grow to 13 million by 2020, according to the International Renewable Energy Agency.

OPEC Deal Not Sufficient for Draining Inventories – 1/23/17

Comments from Saudi Energy Minister Khalid Al-Falih are raises concerns that OPEC’s biggest oil producer will abandon output cuts before prices make significant gains.

“We don’t think it’s necessary, given the level of compliance we have seen and given the expectations of demand,” Al-Falih said recently. “The re-balancing which started slowly in 2016 will have its full impact by the first half. Of course, there are many variables that can come into play between now and June, and at that time we will be able to reassess.”

OPEC’s decision to cut output reversed a two-year policy to maximize sales and protect market share from high cost shale drillers in the U.S — a strategy that had contributed to the worldwide glut of crude oil. The group, together with 11 other countries, came to an agreement on reducing supply by about 1.8 million barrels a day with cuts in effect from January to June.

Al-Falih said he was confident of the deal’s success and that OPEC will stop intervening in the market once global crude inventories return to their five-year average.

Yet, analysts from Bloomberg see the current agreement as a half-measure when it comes to clearing the global glut. According to their analysis, ending the deal by mid-year as planned and restoring production could mean a return to a building oil inventories. OPEC said draining bloated stockpiles was the main aim of the supply curbs.

If they extend the deal for six months beyond its scheduled expiry in June, that surplus will be entirely eliminated by the end of the year, according to Bloomberg calculations based on IEA data. If they don’t prolong the cuts and instead restore output to previous levels, about two-thirds of that glut will remain in place.

Oil prices rose 20% in the month after OPEC agreed to cut output. Since then, they’ve slipped almost 5% as traders, eyeing U.S. shale production, await proof that the deal will work. Many remember how Russia broke its pledge to cutback in 2008, while other members of group also failed to fully implement the agreement.

“OPEC is going to yet again over-promise and under-deliver,” said Eugen Weinberg, head of commodities research at Commerzbank AG, in a Bloomberg TV interview. “We are going to get cheating from OPEC; we’re going to get false information.”

Other analysts say OPEC has little choice but to go forward, given the economic damage the price rout has brought on the group’s members.

“The reward is so big that I believe they will be more respectful than they have been in the past,” said Paolo Scaroni, vice chairman of NM Rothschild & Sons Ltd. “They are so desperate that they will do whatever they can to do it — even sacrifices.”

The figures may not be useful, as exports will for some time still reflect production levels from before the agreement, said Ed Morse, head of commodities research at Citigroup Inc.

Based on the initial data, the committee will be able to report compliance of as much as 60%, said Morse. The best rate attained during its 2008 agreement was 70%, according to Hasan Qabazard, OPEC’s former head of research.

“They’re looking for 80% compliance,” said Morse. “50 to 60% compliance in the first few weeks is pretty good. If you just add up the Gulf countries and Russia today, that’s a very constructive contribution.”

EIA: Oil Outlook – 1/20/17

EIA full article on oil outlook.

The U.S. Energy Information Administration’s January Short-Term Energy Outlook (STEO) forecasts benchmark West Texas Intermediate (WTI) crude oil prices to average $52/b in 2017 and expect it to rise to $55/b in 2018.

Strong demand and the recent agreement among members of OPEC and some key non-member oil producers are putting upward pressure on crude oil prices. However, the EIA forecasts increases in global production should prevent significant price changes through 2018. Despite the recent OPEC agreement, EIA expects global petroleum and other liquid inventory builds to continue, but at a slowing rate, in 2017 and 2018.

Market reactions to the November OPEC agreement contributed to rising oil prices in December despite increasing global oil inventories and U.S. oil rig productivity.

Crude oil spot prices are expected to remain fairly flat over 2017 in part as a result of the responsiveness of U.S. tight oil production. The EIA forecasts oil prices will slowly increase in 2018 as inventory builds slow. This rise in oil prices encourages production increases, particularly in the Lower 48 onshore. However, any production increases realized while the global markets are building inventories will moderate price increases, which will in turn limit additional production increases.

Total U.S. crude oil production is estimated to have averaged 8.9 million b/d in 2016, down 0.5 million b/d from 2015, with all of the decline in the Lower 48 onshore. The EIA forecasts U.S. crude oil production will increase to an average of 9.0 million b/d in 2017 and 9.3 million b/d in 2018 on higher activity, drilling efficiency, and well-level productivity.

In its previous outlook, the EIA expected Lower 48 onshore production to decline through the end of 2017. However, the new forecast reflects crude oil prices near or above $50/b, which have led to increased investment by some U.S. production companies, particularly in the Permian Basin. EIA expects that declines in Lower 48 production have largely ended and forecasts relatively flat production in the first quarter of 2017 at 6.7 million b/d, which will then increase to an annual average of 7.0 million b/d in 2018. Even modest increases in crude oil prices could contribute to supply growth in other U.S. tight oil regions.

EIA estimates global petroleum and other liquids production will increase through the forecast. Annual estimated and forecast production levels for 2016, 2017, and 2018 were revised up to 96.4 million b/d, 97.5 million b/d, and 98.9 million b/d, respectively. More information about crude oil prices and production is available in EIA’s latest This Week in Petroleum.

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