Wednesday, November 30, 2011

Democrats Need to Re-Think U.S. Energy Policy

Charles K. Ebinger, director of the Brookings Institution's Energy Security Initiative, writing in the L.A. Times (emphasis mine):

"Let me say upfront that I have always been a Democrat. However, I also vote my conscience and have supported independent candidates. Today, energy policy is one area where I think my party is wrong.

Today's Democratic leadership has reached a nadir in rational energy policymaking. In the last several years, congressional party leaders have squandered opportunities for a nuclear waste management storage program and have shown opposition to shale gas production. This month, the party reached a new low: The Obama administration's delay of the Keystone XL pipeline from Canada, in spite of its promise of an additional 750,000 barrels of oil per day and the thousands of new jobs it would create, was an inexcusable political decision unbecoming of a pragmatic leader.

The former generation of Democratic legislators would have embraced the energy opportunities before the United States today. Whoever is president in 2013, it will be the first time in 40 years that the United States has a serious chance to transform its energy landscape. The previously accepted inexorable decline in U.S. oil and gas production is being reversed: New "tight oil" — resources trapped in low-porosity formations such as shale rock — could provide the country with several million barrels of oil per day in the coming decades, and the country's abundant and accessible shale gas reserves may leave us gas independent for up to a century. There also are still conventional reserves to be tapped, most notably in Alaska, where the Beaufort and Chukchi seas and the North Slope hold an abundance of hydrocarbon reserves.

Exploitation of these resources would have a number of benefits. Increased domestic oil production, coupled with growing imports of Canadian oil sands, would result in a reduction of non-North American oil imports, leading to a significant improvement in the country's yawning trade deficit. Increased gas production would be valuable for cleaner electricity generation (when compared with coal) and could also signal a revival of the U.S. industrial and petrochemical sectors. Further, if natural gas can be deployed in the commercial heavy-duty vehicle fleet, we would be able to reduce our oil imports dramatically. We may even be able to export gas to our allies and trading partners.

The Democratic leadership must start facing the hard truths about energy and stop proselytizing that renewable sources of energy can replace the fossil fuels currently in use. This is not to argue that the reduction of fossil fuel emissions is not an urgent priority. However, the emphasis must be on job creation and on building the 21st century energy infrastructure that will reestablish America's primacy in the world. The size of our energy resources gives us the wherewithal to make this transition."

MP: Amen, Brother Ebinger.

(Thanks to Warren Smith for the pointer.)

20 Comments:

At 11/30/2011 11:28 PM, Blogger PeakTrader said...

"...the country's abundant and accessible shale gas reserves may leave us gas independent for up to a century."

Maybe, my prior comment (for the skeptics) better belongs here:

New York Times:

Shale Gas

"The Barnett in Texas, the Haynesville in East Texas and Louisiana and the Fayetteville, across Arkansas — less than 20 percent of the area heralded by companies as productive is emerging as likely to be profitable under current market conditions, according to the data and industry analysts.

Gas is currently going for $4.38/MCF (thousand cubic feet, or MMBTU). Most shale gas wells are losers, or only break-even at that price. However, if gas were to rise into the $6-$8 range, the profitability picture changes considerably."

My comment: Gas hit $14 a few years ago.

 
At 11/30/2011 11:31 PM, Blogger PeakTrader said...

Lower production costs, e.g. through technology, and higher prices will make shale gas more profitable.

 
At 12/01/2011 12:00 AM, Blogger Benjamin said...

Taxing gasoline and getting rid of corporate income taxes strikes me as a good idea.

 
At 12/01/2011 6:41 AM, Blogger geoih said...

I keep checking the Constitution and I can't find where the Federal government is given any authority to even have an "energy policy".

 
At 12/01/2011 11:10 AM, Blogger Che is dead said...

Obama is getting ready to impose a complete moratorium on hydraulic fracturing: Will The EPA Choke Oil Shale Production, IBD

At what point do we acknowledge that they are deliberately trying to undermine and destroy the economy of this country?

 
At 12/01/2011 11:41 AM, Blogger Bill said...

A qualified "Amen." The drivel on "yawning trade deficit" detracted from the message.

 
At 12/01/2011 12:32 PM, Blogger Tom said...

It takes galactically stupid policies by professional Democrats to awaken Democrat voters.

 
At 12/01/2011 12:55 PM, Blogger Paul said...

Che,

"At what point do we acknowledge that they are deliberately trying to undermine and destroy the economy of this country?"

Obama always said he wanted to "transform" it.

 
At 12/02/2011 5:03 AM, Blogger Ron H. said...

Geoih: "I keep checking the Constitution and I can't find where the Federal government is given any authority to even have an "energy policy".

Having recently thrown off a tyrannical government, and being extremely fearful of creating another, The Founders worked for months to design a Constitution that limited government in every possible way, forbidding it to interfere with the rights of sovereign individuals, and limiting it to very specific and limited powers, in the end they decided to just throw it all out the window by including the General Welfare Clause.

Anyway, that's sort of what we are expected to believe. :)

 
At 12/02/2011 10:37 AM, Blogger VangelV said...

Gas is currently going for $4.38/MCF (thousand cubic feet, or MMBTU). Most shale gas wells are losers, or only break-even at that price. However, if gas were to rise into the $6-$8 range, the profitability picture changes considerably.

First of all, Henry Hub natural gas is going for around $3.60. If we look at the futures we see no $8 price quoted. Yes, we see gas getting into the $6 range but not until 2019. By that time the shale gas producers would have chewed through hundreds of billions in cash and would have seen most 'investors' abandon them.

See the problem? The more the shale producers drill the higher their drilling costs and the lower their price. That is not a recipe for success no matter how optimistic a line of argument you choose to take.

The Democrats are idiots because their irrational attack on energy producers is harmful to consumers and workers. But that does not mean that shale gas will ever be a great success or a solution to our problems.

 
At 12/02/2011 10:42 AM, Blogger VangelV said...

Lower production costs, e.g. through technology, and higher prices will make shale gas more profitable.

First, the technology is not new. And it has already been applied to the best areas in the core formations. Any improvement will have to be applied to lower quality formations that will have less energy to extract. Second, the futures market is not predicting enough of an increase to make shale gas profitable over the next two decades. Third, even if prices rose the imbedded energy investment in the production process will cause the input costs to increase. That means that the price of the product will have to rise much faster than the costs of production to stop the negative cash flows. I am not seeing that in the data.

 
At 12/02/2011 11:23 AM, Blogger juandos said...

Consider the following for what its worth: Demand for products and services used in US shale gas development will grow to nearly $50 billion in 2015 as industry activity continues to escalate in the emerging Marcellus, Haynesville and Fayetteville shale plays. While shale gas drilling will slow from the rapid buildup of the 2005-2010 period, the industry will still bring more than 8,000 new producing wells online through 2015...

 
At 12/02/2011 11:28 AM, Blogger juandos said...

Here's something vangeIV has been harping and apprently for good reason...

Shale Plays affect on the Volatility of Natural Gas Prices

Based on last months New York Mercantile Exchange (NYMEX), Natural Gas prices are holding between $4.20 to $4.30 per MMBtu. Many factors come into play with when pricing commodities on NYMEX; however, all eyes continue to focus on the game changer – Shale Gas.

Shale continues to take center stage, albeit with mixed opinions, as compared to previous robust projections. These mixed opinions are adding some volatility to the direction of natural gas prices. Yet, it looks like North American producers are scaling back due to economics... (there's a bit more)

 
At 12/02/2011 3:39 PM, Blogger Dave said...

NAT gas is currently at $3.59 on CNBC.

In europe & Asia it varies from $10.00 to $16.00.
It used to be $14.00 in the U.S. several years ago.
What do you suppose has caused such LOW prices in the U.S. ?
It makes little difference to the consumer if companies are making money or not. If you think they are losing go SHORT CHK--- or your favorite Nat Gas play
If prices RISE from today's levels the number of rigs drilling will soar as Nat gas producers will be able to hedge at profitable levels..Many of the new wells being drilled in the SHALE plays are VERY profitable at today's prices and the industry will keep drilling as new technology is driving finding costs lower daily !

 
At 12/02/2011 4:14 PM, Blogger VangelV said...

Consider the following for what its worth: Demand for products and services used in US shale gas development will grow to nearly $50 billion in 2015 as industry activity continues to escalate in the emerging Marcellus, Haynesville and Fayetteville shale plays. While shale gas drilling will slow from the rapid buildup of the 2005-2010 period, the industry will still bring more than 8,000 new producing wells online through 2015...

Here is one problem. We read, "Low natural gas prices since 2008 have narrowed the profit margin of shale gas investment. Shale gas producers are responding to this trend by seeking improvements in well economics, in many cases through the use of higher value products and services. Through the forecast period, shale gas producers will continue to embrace innovations such as multiple-well drilling pad systems and advanced hydraulic fracturing materials in order to improve drilling efficiencies and increase per-well gas output, thus bolstering profitability as gas prices remain below 2008 highs."

But there never was any profitability at anywhere near the current price levels. The profits came from hedging contracts during periods of higher prices that are now well behind us. The increased per-well output is largely a myth. The companies are trying to conserve capital by drilling the best targets first. But all that accomplishes is to guarantee more losses when the lower quality properties are developed later.

The report cited is pure PR spin. It does not discuss depletion, EUR assumptions, divergence between the projections and the real data, cash flow, or capital issues. Serious investors need to look at the actual details and look at the full disclosure in the SEC filings.

 
At 12/02/2011 4:27 PM, Blogger VangelV said...

NAT gas is currently at $3.59 on CNBC.

In europe & Asia it varies from $10.00 to $16.00.
It used to be $14.00 in the U.S. several years ago.
What do you suppose has caused such LOW prices in the U.S. ?


A change in demand is one thing. Activity in the real economy has shrunk and has changed the demand curve. The huge investment is another. Billions have gone towards drilling wells even if the losses cannot be justified by the investment investment. What we have is a temporary glut that can only be resolved by reduced drilling activity or a pickup in demand.

It makes little difference to the consumer if companies are making money or not.

But profitability is required for drilling to continue to be financed. This is why sector CEOs talk about funding gaps and asset sales on the conference calls that nobody seems to be paying attention to. When reality intervene I hope not to read how all this was unexpected.

If you think they are losing go SHORT CHK--- or your favorite Nat Gas play

I don't know about others but I do not go short during bubbles because the insanity can last a lot longer than expected.

If prices RISE from today's levels the number of rigs drilling will soar as Nat gas producers will be able to hedge at profitable levels.

How does that happen? First, it takes a lot of time and effort to build new rigs and train new crews. Many of the best drillers are reaching retirement age because past volatility was tough on the demographic profile. And any rush to hedging will add artificial supply on the paper side and keep prices lower than they would otherwise be at a time when input costs are rising.

Many of the new wells being drilled in the SHALE plays are VERY profitable at today's prices and the industry will keep drilling as new technology is driving finding costs lower daily !

No they are not. You need to check the 10-K filings and look at the details. There are very few wells that could be profitable at current prices. And those that are do not return enough of a profit to offset the losses elsewhere.

 
At 12/03/2011 12:34 PM, Blogger juandos said...

"The report cited is pure PR spin"...

No doubt in my mind vangeIV that there was more sales pitch than substance in that release...

None the less don't you think that to some small degree this run up of exploring shale gas might help push normal exploratory methods a bit?

 
At 12/05/2011 7:57 PM, Blogger Bill Hartman said...

So natural gas sells for less than $4.30 in the US, but $10 to $16 in Europe and Asia. How is this possible? Why aren't entrepreneurs making bug bucks on the difference?

Because we lack the pipelines and liquidation facilities to move the natural gas from where it is to where it can be consumed.

So the low prices are simply another artifact of government interference in energy development, not a problem with the technology being too expensive.

 
At 12/05/2011 7:57 PM, Blogger Bill Hartman said...

This comment has been removed by the author.

 
At 12/08/2011 9:18 AM, Blogger VangelV said...

None the less don't you think that to some small degree this run up of exploring shale gas might help push normal exploratory methods a bit?

Destroying capital is never a good idea unless there is a huge prize at the end of the process that will increase capital formation. In the case of shale the problem is not inadequate exploration but low energy density so improving 25 year old drill technology does not address the real issue.

 

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