INSIGHT: US oil, gas output to surge, but it could be better

19 December 2013 16:00  [Source: ICIS news]

By Joe Kamalick

US energy outlook is good but could be betterWASHINGTON (ICIS)--US production of oil and natural gas will surge over the next 25 years, a new federal report said this week, reaching record levels and igniting still more growth in chemicals and broader manufacturing - and it could be even better than forecast.

In its latest and especially rosy report on the nation’s energy outlook to 2040, the Energy Department’s Energy Information Administration (EIA) said that US domestic natural gas output will see an increase of 56% between 2012 and 2040 “when production reaches 37.6 trillion cubic feet (tcf)”.

US production of natgas in 2012 totalled 24 tcf and consumption was 25.6 tcf.

In other words, US output of natural gas in 2040 likely will be nearly 50% greater than the nation’s current consumption.

Of course US industrial consumption of natural gas also will grow over that same 27-year period, expanding by 22% as early as 2025, the EIA said.

Even with that growth in natgas consumption, the administration expects there will be enough gas surplus to support a substantial increase in exports of liquefied natural gas (LNG), growing to 3.5 tcf annually before 2030 and holding at that level through 2040.

In short, the nation will be awash in natural gas over the next quarter century, and the US chemical industry will be a major beneficiary.

Overall, the EIA says that the continuing availability of abundant and low-cost natural gas over its forecast period will trigger strong growth in gas-intensive US industries.

“Industrial shipments grow at a 3% annual rate over the first ten years of the projection and then slow to a 1.6% annual growth over the balance of the projection” to 2040, EIA said.

Within the overall gas-intensive industrial sector, “bulk chemicals and metals-based durables account for much of the increased growth”, the EIA analysis said.

“Industrial shipments of bulk chemicals, which benefit from an increased supply of natural gas liquids, grow by 3.4% per year from 2012 to 2025,” the report added, although that pace of expansion was forecast to moderate beyond 2025.

That may be putting it mildly, according to the American Chemistry Council (ACC).

Council president Cal Dooley says that “we probably have as much as a 30 year supply of natural gas in the US that can be produced for less than $4/m BTUs”.

In addition, Dooley told a recent press conference, “by the year 2025 I believe we could see a four-fold increase in the amount of ethane that is available in the US”.

The availability and low cost of natural gas is particularly crucial to US petrochemicals producers and downstream chemical makers because natural gas liquids (NGL) are the principal feedstock for the industry and gas is a key energy fuel, both for on-site use and to power commercial electric utilities. 

Chemical makers use a lot of electricity, so having low-cost gas and plentiful NGLs on hand gives US producers huge feedstock, operating and pricing advantages over most other petchem producing nations that are dependent on higher-cost, petroleum derived naphtha feedstock.

“I think what we have significant confidence that there is a significant amount of supply of natural gas that can be extracted and produced at a reasonable price that we are going to have a sustained competitive advantage globally,” Dooley said.

Because of the newly abundant supplies of natgas, Dooley said that his industry has seen “a significant turnaround, with significant investments coming to the US from companies from India, China, Brazil as well as western Europe and Japan”.

He said that just since 2011, ACC has identified some 136 new chemical production projects in the US, representing investments of about $90bn (€66bn)

“So it’s an exciting time for the industry, and the reason for that is predominantly because of the changing energy picture, and the fact that our industry is probably the one that is best positioned to capitalise on the increased supplies of natural gas,” he added.

But on the oil side, the EIA outlook is a little less sanguine about long-term growth prospects for domestic crude.

To be sure, the administration sees US oil output adding some 800,000 bbls/day annually through 2016, “when domestic production comes close to the historical high of 9.6m bbls/day achieved in 1970”.

However, EIA says it sees domestic crude output levelling off by 2020 and then beginning a slow decline thereafter. That year is when production from shale deposits and other tight oil resources is expected to edge lower.

But energy industry officials say that projected plateau and subsequent decline in domestic US crude output is not because of a lack of resources - rather because they are restricted by federal policy.

By law and as a matter of practicality, the EIA must base its annual energy forecasts on “the effects of policies that have been implemented in law or regulations”.

Those policies under the current Obama administration include a ban on oil and gas exploration and development in approximately 85% of US outer continental shelf (OCS) regions and restrictions on drilling in much of the vast federal onshore land holdings.

The off-limits ban on 85% of US OCS regions - believed by many to be resource rich - has been in force for more than 30 years.

Congress first imposed the OCS drilling moratorium in 1982 and renewed it each year thereafter until late 2008 when the ban was lifted as US gasoline prices spiked. 

But on taking office in 2009, President Barack Obama renewed the moratorium through his Interior Department’s five-year energy leasing plan that essentially excluded all OCS regions except for those areas already under development in the Gulf of Mexico.

Benjamin Cole, communications director for the Institute for Energy Research (IER), an energy industry think-tank, contends that if federal bans on OCS development and restrictions on federal onshore lands were lifted, the EIA’s forecast for a decline in domestic US oil production beginning in 2020 would be reversed demonstrably.

“If the president were to throw open the doors for full offshore and onshore leasing right away,” he said, “then that forecast for a 2020 drop-off in production would never happen,” Cole said.

He noted that it takes seven to ten years for new seismic research, leasing issues and permitting, state government concerns and infrastructure work to be addressed and completed before the first oil can flow from a new offshore or onshore field prospect.

Consequently, if those restricted areas were opened to exploration and production now, he said, abundant new supplies of domestic US crude would begin to flow in 2020 and beyond, giving the lie to EIA’s prediction of an oil output downturn.

“This is the folly of keeping these areas off limits now, knowing that tight oil production will peak in 2020,” he said.

“Now is the time to open the OCS to develop those areas and keep the US trajectory to energy security going forward,” Cole said.

($1 = €0.73)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy


By: Joe Kamalick
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