[1] Dr. Salman Ghouri Oil & Gas industry advisor. The views,
findings, interpretations, and conclusions in this paper are those of authors.
[2] Areeba Ghouri is
an Economist & J.D Candidate, Cass of 2017. Indiana University Robert H.
McKinney School of Law.
In 2005,
the United States oil import dependency peaked at 60.33% and ever since it has
been on the decline. Thanks to higher oil prices that provided much needed
breathing place to new-state-of-the-art-technology to nurture and prosper. As
a result of 3-D seismic, horizontal drilling and hydraulic fracturing, the
industry was able to successfully penetrate the shale/tight oil/gas. In less
than a decade US shale oil production recorded 3-3/4 fold increase - from 1.24 million
barrels daily (MMBD) in 2007 to over 4.68 MMBD at the end of 2014. As a result,
US net oil import dependency
down from 60% in 2005 to below 27% at the end of 2014 (Figure-1).
Shale oil
flourish during the regime of higher oil prices, however, as oil prices plunges
below $60/BBL the drilling activity substantially declined while shale oil
production continues move upward due to a number of months lags are involved in
drilling, completing and fracturing (Figure-2). If prices remain around $60/BBL
for extended period of time surely US shale oil boom shall turn in to bust at
least in high cost basins – raising US net oil import dependency. The decline in shale oil production was already
witnessed in May 2015 and if prices remain around $60/BBL, this downward trend
will be further accelerated. That is, to sustain shale oil production it requires
more wells to be drilled, completed and fractured (or already drilled wells to
be quickly completed and fractured). However, this is not likely to happen in
the regime of lower oil prices as drilling activities have substantially
declined and lately industry also started slashing manpower due to depleting
profit margins.
Figure-1:
US
net oil import dependency Source - EIA
|
Figure-2:
US shale
oil profile Source - EIA
|
In the EIA AEO2014 Reference case, the United
States will become a net exporter of LNG in 2016, and will become an overall
net exporter of natural gas in 2018, two years earlier than in AEO2013.
U.S. exports of LNG from new liquefaction capacity are expected to surpass 2 trillion
cubic feet (Tcf) by 2020 and increase to 3.5 Tcf in 2029 (about 10 Bcfd) or
equivalent to about 71 million tons annually (MTPA) LNG capacities. Net
pipeline imports from Canada fall steadily until 2033, and then increase
through 2040. Net pipeline exports to Mexico grow by more than 400% in the
Reference case, with additional pipeline infrastructure added to enable the
Mexican market to receive more pipeline natural gas from the United States.
Like shale oil boom in the US that helps in reducing its
net oil import dependency, the shale gas boom could also provide a cutting edge
in further reducing its oil import dependency by substituting oil for natural
gas in transport and industrial sectors that jointly accounted for 98% of oil
consumed in the United States in 2013 (transport 71.6% and industries 26.3%).
However, instead of benefiting from domestic shale gas, U.S. prefers to export
its cheap shale gas in the form of LNG to both FTA and non-FTA countries to the
extent of 71 MTPA or even over 100 MTPA. According to EIA, U.S. cumulative net
LNG exports from 2012 to 2040 are up by 160% in AEO2014 compared with AEO2013,
supported by increased use of LNG in markets outside North America, strong
domestic production, and low U.S. natural gas prices relative to other global
markets. Some experts believe that gas exports will result in a net benefit for
the U.S. economy in terms of revenues and job creation. For example, [8]
revenues from LNG exports can contribute to enhancing the U.S. trade balance
taxes and royalty fees on natural gas producers, increase state and local
government revenue, and one LNG project can create 5000 jobs [9]. In addition,
LNG exports could create revenues and jobs in upstream natural gas production.
In 2010, the Pennsylvania state government received $1.1 billion in state and
local tax revenues from Marcellus shale gas development; the project has
created 140,000 jobs to date [10].
Can we learn from past mistakes?
The LNG liquefaction capacity is building on the
assumptions that plenty of tight shale resources remain for many decades to
come. There is no doubt about the huge resource base, nevertheless one should
not forget presumptions that were made in early 2000s when the country
constructed a number of regasification terminals to import bulk of LNG in order
to meet the country’s growing natural gas demand. Just less than a decade (when
regasification terminals were barely used), U.S. is reversing its policy and
constructing 71 MTPA LNG capacity and have aggressive plans to further increase
it to over 100 MTPA in the future. All these decisions are made on the basis of
huge shale gas potential in the country and availing opportunity of cheap
indigenous resource to maximize the benefits of exporting it to Europe and the
Asian market. However, a number of studies concluded that it is not profitable
for U.S. to export its shale gas resources in the form of LNG. To name a few,
Medlock [11] found that exporting U.S. LNG from Gulf of Mexico is not
profitable when land costs (the total cost of feed gas, liquefaction and
transportation) are compared with European and Asian market prices. Henderson
[12] concluded that the U.S. price, at $5/MMBtu is no longer profitable in
European market in the short term. While other argues
that LNG export will harm U.S. consumers. They claim that U.S. prices will
increase as no gap between the global price and the domestic price exists [13].
The higher domestic gas prices could reduce the competitive advantage for the
manufacturers who use natural gas to produce plastics and chemicals [14].
In
addition, the downside of exporting substantial quantity of LNG may put
pressure on country’s resource base and call for drilling/fracturing of more
wells to meet the contractual commitment as well as meeting domestic demand.
This will subsequently increase the cost of producing shale gas thus pushing
the domestic gas prices as well as threatening the environmental related
issues. Seksun Moryadee and others [15] concluded that increased U.S. LNG
exports lead to higher prices, lower consumption, and increasing production in
the U.S. domestic market. A 10% shortfall in production with 99.7 Bcm of U.S.
LNG exports results in a price increase of approximately $2/MMBtu relative to
the Base Case in North America market.
Moryadee and others [15] also concluded that increased U.S. exports reduce
prices significantly in importing markets. For example, prices in Spain
decrease by $2.7/MMBtu in 2020 under the High Exports compared with the Base
Case. While increased LNG exportation results in positive effects on Asia and
Europe. On the other hand, the increase in cost and price of natural gas in
U.S. market could hurt the domestic consumers at the cost of transferring of
environmental friendly sources out of the country.
Should Shale oil and Shale gas complement each other
Based on
the conclusion of above studies and many others, instead of adopting LNG export
strategy – extensive usage of natural gas domestically could certainly have
given competitive edge to U.S. manufactures, create more jobs and bring more
prosperity to American public at large. Increasing the role of natural gas in
transport sector, for example natural gas vehicles (NGV) will considerably
reduce the fuel cost to most Americans, further improving the quality of life
and bring more prosperity by utilizing cheaper domestic resource rather
than transferring benefits externally.
The U.S. is a very large country with the total
population of 318 million and excellent road infrastructure across the country.
According to data base of Bureau of Transportation Statistics [7], at the end
of 2011 United States had 253 million highway total (registered vehicles) – 76%
consists of light duty vehicles, 16% light duty vehicles & long wheel, 3.1%
trucks (single-unit 2-axle 6-tire or more) and about 1% truck combination. The
balance is associated with motor-cycles and buses. During 2011, U.S. consumed
18.9 MMBD (consumption in 2014 was over 19 MMBD). Transport sector consumed 13.3
MMBD that represents 71% of the total oil consumed in 2011. Light duty vehicles
consumes 8.41, commercial light trucks 0.26, bus transportation 0.11, freight
trucks 2.5, rail 0.266, shipping domestic 0.051, Air 1.196, military 0.354 MMBD
beside consumption of lubricants and pipeline fuel. Motor gasoline is the
largest source in transport sector followed by distillate fuel (diesel oil
mainly used in light to heavy freight vehicles and buses) and jet fuel.
Based on EIA AEO2014, the U.S. net oil import dependency is expected to decline to 29.65% in 2020 and thereafter gradually hitting back to 41.35% in 2040 (Figure-3). The question is why does the U.S. want to continue to rely on imported energy particularly that of petroleum? The U.S. can easily utilize its domestic shale gas in substituting in transport sector that is responsible for consuming 72% of the total petroleum consumed in the country in 2013. The current U.S. NGV penetration rate of 0.1% shows the great potential of benefitting from natural gas resource in transport sector (penetration rate = number of vehicles on natural gas/total number of registered vehicles x100). Using rule of thumb (a layman approach), if U.S. is able to achieve 10% penetration rate (of existing fleet of 253 million) in CNG, LPG, LNG then it can save approximately 1.13 MMBD of petroleum in transport sector by substituting indigenous natural gas (Appendix-1). This will substantially cut in net oil import dependency depending on NGV penetration rate. If this strategy is promoted then it will complement shale oil strategy as well. During the period of lower oil prices like we are experiencing now shale gas use in transport and industry will provide comfort to shale oil without compromising the impact of US net oil import dependency.
The analysis of this paper suggests that U.S. should not aggressively
follow the strategy of LNG exports other than the projects that have already
been committed or where existing infrastructure is already in place
(Brownfield). That is, places where liquefaction plants need to be converted
into regasification plant instead of going for full Greenfield projects. Large
quantity of LNG exports no doubt will increase the revenues; create jobs in
upstream and other associated downstream activities. However, these benefits will dearly cost the
American public over the long period in the shape of higher domestic gas
prices. The U.S’s exports of environmentally friendly and cheaper natural gas
resources will benefit more the LNG
importing countries than the U.S. Instead, U.S. should devise the balance strategy
of utilizing shale gas within the country in industrial and transport sectors
as well as export LNG in a limited quantity. The cheaper domestic source will
provide cutting edge to U.S. industries and also reduce its net petroleum
import dependency by substituting gas in the transport
sector apart from creating more jobs. This strategy surely complement the shale
oil industry in the regime of lower oil prices and also counter shale oil burst
and check on increasing US net oil import dependency.
[1] Energy
Information Administration (EIA), Data Base. Available
from: http://www.eia.gov/countries/data.cfm
[2] Ghouri.
Salman., Ghouri Areeba. Key Energy
Challenges for the World Economy – 2050.
Emirates Center for
Strategic Studies Research (ECSSR), Abu Dhabi, UAE.
[3] Ghouri. Salman., Ghouri Areeba. The US unconventional oil
revolution: are we at the beginning of a new era for US oil? European Energy Review June 18, 2012.
[4] Energy
Information Administration, Annual Energy Outlook 2014 (AEO2014). Available from: http://www.eia.gov/forecasts/aeo/er/
[5] Abrar
Chaudhury. Running
Out of Gas? Lessons from the Natural Gas Vehicles (NGV) Market in Pakistan. Environmental Change Institute, University of
Oxford, UK.
[6] Pakistan Economic Survey, 2012-13.
http://finance.gov.pk/survey/chapters_13/14-Energy.pdf
[7] United
States Department of Transportation, Bureau of Transportation Statistics.
Table 1-11:
Number of U.S. Aircraft, Vehicles, Vessels, and Other Conveyances. http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01
[8] J. Folks. Export Gas to
Create Jobs. American Thinker
(2012) Available from: http://www.americanthinker.com/2012/06/export_natural
The following calculations are very rough
sort of layman estimates and may provide some sense of directions but it may requires comprehensive analysis.
[9] The Washington Post. Boosting the Economy through Natural Gas
Exports
(2012) Available online at: http://www.washingtonpost.com/opinions/natural-gas-exports-offer-much-to-the-us-economy/2012/03/13/gIQA4WibCS_story.html
[10] T. Considine, R. Watson, S. Blumsack, The Pennsylvania
Marcellus Natural Gas
Industry:
Status, Economic Impacts and Future Potential, 2011. Available from: http://marcelluscoalition.org/wp-content/uploads/2011/07/Final-2011-PA-Mar-cellus-Economic-Impacts.pdf.
[11] K.B. Medlock. U.S. LNG Exports: Truth and Consequence
Institute For public
Policy Research (2012) Rice University. Available from: http//bakerinstitute.org/publications/US%20LNG%20Exports%20%20Truth%20and%20Consequence%20Final_Aug12–1.pdf
[12] J. Henderson. The Potential Impact of North America
LNG Exports
Oxford Institute for Energy Study (2012)
(Accessed November 2012). Available from: http://www.oxfordenergy.org/wpcms/wp-content/uploads/2012/10/NG-68.pdf
[13] R. Olson. How to Boost U.S. Exports: Legalize Them
The Foundry (2012) Available from: http://blog.heritage.org/2012/09/26/how-to-boost-u-s-exports-legalize-them/
[14] A. Jennifer Dlouhy. Obama
Administration Authorizes More Natural Gas Exports.
FuelFlix (September 2013)
[15] Seksun Moryadee, Steven A. Gabriel, Hakob G. Avetisyan
Investigating
the potential effects of U.S. LNG exports on global natural gas markets. Energy Strategy Reviews 2 (2014) 273-288. The
Foundry (2012) Available from: http://blog.heritage.org/2012/09/26/how-to-boost-u-s-exports-legalize-them/
Appendix-1
Assumptions & Calculations
Total number of vehicles (registered vehicles) = 253 Million in 2011
76% consists of light duty vehicles = 192.3
Million
24% rest =
60.7 Million
6% light duty vehicles & long wheel,
3.1% trucks (single-unit 2-axle 6-tire or
more) and
1% truck combination.
The balance is associated with motor-cycles
and buses.
Petroleum Consumption in Transport Sector = 13.3 MMBD
Light duty vehicles consumes 8.41,
Commercial light trucks 0.26,
Bus transportation 0.11,
Freight trucks 2.5,
Rail 0.266,
Shipping domestic 0.051,
Air 1.196,
Military 0.354 MMBD
Balance consumption of lubricants and
pipeline fuel.
Assume only road transport in calculations
(excluding air, rail, shipping, military and other fuels)
Light vehicles:
8.41 MMBD x 365/192.3 = 15.96
barrels/vehicle/year
If penetration rate is 10% i.e., 10% of 192.3
= 19.23 Million
Saving MMBD would be 19.23 x106
15.96/365 = 0.841 MMBD
Others
No. of vehicles = 60.7 million
Oil consumption = 2.87 MMBD
2.87 MMBD x 365/60.7 = 17.26
barrels/vehicles/year
If penetration rate is 10% i.e., 10% of 60.7
= 6.07 Million
Saving MMBD would be 6.07x106
17.26/365 = 0.287 MMBD
Total Savings: 0.841+0.287
= 1.13 MMBD
