Election 2012: Romney on Energy

After last week's review of President Obama's energy record and campaign materials on energy, Governor Romney's energy plans present a sharp contrast. They are based on a fundamentally different view of energy and the economy, relying on markets to allocate capital to the most productive opportunities, rather than on government to guide a mix of public and private investments along specific paths towards designated ends. They also emphasize technologies that are already deployed at scale today, not those still under development or striving to attain scale. Implicitly, the Romney plan prioritizes supplying the energy for a robust economic recovery over programs designed to address long-term environmental challenges like climate change. These positions present voters with a serious and consequential choice on November 6th.

The Romney campaign's website on energy arrays the candidate's ideas mainly in words, rather than with the kind of images and interactive features that dominate the Obama campaign's sites. Energy is the first plank of Governor Romney's five-point "Plan for a Stronger Middle Class", though it requires a little work to explore the details of his energy program. A list of bullet points  is backed up by a lengthy policy paper with numerous references to external sources, but you have to look for it.

The Romney energy plan focuses mainly on oil, gas, coal and nuclear energy, which together meet 91% of current US primary energy demand and which the Department of Energy projects will still provide nearly 90% in 2020 under the policies in place today. You won't find much on his campaign's website about the new renewables that generated electricity equivalent to 2% of our energy use last year, beyond a critique of the administration's investment in Solyndra and a commitment to R&D on new energy technologies.

Among the details of his plan are support for expanded offshore drilling, including areas such as offshore Virginia that were originally in the Obama administration's early-2010 offshore development blueprint, along with a comprehensive assessment of US resources using current technology, rather than further extrapolations based on 1980s technology. Governor Romney proposes expanding energy cooperation with both Canada and Mexico and would approve the entire Keystone XL pipeline. His goal of attaining North American energy independence is aggressive, yet recent analysis by Citigroup puts it within the realm of possibility. It appears to be based on an assessment by Wood Mackenzie, a top-notch energy consultancy, indicating that US oil and natural gas liquids output could expand by 7.6 million barrels per day, with 6.7 million of that coming from federal lands and waters currently off-limits to development. That compares to US net petroleum imports of 8.5 million barrels per day in 2011.

Another aspect of the plan aimed at streamlining the permitting of energy projects could be just as useful for utility-scale renewable energy projects as for oil and gas exploration and production. Regulatory and permitting delays are among the key reasons it takes longer and costs more to develop crucial energy and infrastructure projects here than in many of the countries against which our competitive standing has been slipping. Governor Romney also proposes giving states greater control of permitting on their non-park federal lands. That could substantially increase energy access and output, especially in the west, where the federal government owns over 280 hundred million acres, or 37% of those 11 states, net of tribal lands.

There are also some missing elements. I would have liked to see more about how renewables fit into Governor Romney's vision. He apparently supports the Renewable Fuels Standard but is silent about the increasingly urgent need to reform it. He is on record against the extension of the wind Production Tax Credit (PTC), a 20-year old subsidy roughly equivalent to the current price of natural gas, yet misses the opportunity to explain how all types of energy would be treated under his proposal to reduce corporate income tax rates while broadening the tax base--policy-speak for closing loopholes and eliminating incentives. In last night's debate he said, referring to the $2.8 billion in annual tax incentives for oil and gas identified by the Department of Energy, "... if we get that tax rate from 35 percent down to 25 percent, why that $2.8 billion is on the table. Of course it's on the table. That's probably not going to survive (if) you get that rate down to 25 percent." I'd also like to hear more about how Governor Romney would address greenhouse gas emissions once the economy returns to stronger growth.

Superficially, much of the Romney energy agenda evokes a return to the pre-2008 status quo: heavy on oil, gas and coal, light on renewables, and largely ignoring climate change. I see it from a different perspective: When Barack Obama began running for President in 2007, the US was considered by many to be tapped out on conventional energy, with domestic oil and natural gas production exhibiting signs of deep and permanent decline. In that context it made sense to look beyond those resources to the potential of renewable energy and vehicle electrification, even if the transition involved would be lengthy. That approach also appeared synergistic with reducing greenhouse gas emissions, and a strategy was born. In the meantime, however, it turned out that US oil and gas were far from exhausted, and the most productive new energy technology of this decade wasn't wind, solar or biofuels, but the combination of hydraulic fracturing ("fracking") and horizontal drilling that has unlocked hundreds of trillions of cubic feet of shale gas and tens of billions of barrels of shale oil or "tight oil" resources. Since 2008 the expansion of shale gas drilling has added as much new US energy production as over 250,000 MW of wind turbines or solar panels--8x the wind and solar power added in the same interval. To the surprise of many, the big global energy opportunity of the 20-teens is US hydrocarbons. The Romney plan reflects the unexpected energy transformation we're experiencing.

As in 2008, this blog isn't in the business of endorsing candidates. Energy remains an issue that, like the Cold War, demands bi-partisan cooperation and some level of consistency from one administration or Congress to the next. However, that doesn't prevent me from observing that the energy agendas of the two campaigns are not equally well-suited for a period of serious US fiscal constraints and shrinking federal discretionary expenditures, in which our energy security and economic growth will still depend largely on fossil fuels. In that context, it's highly relevant that the "all of the above" credentials of one candidate depend on oil and gas outcomes that his policies did little to support. Of course, energy isn't the only issue that matters, but then you wouldn't be reading this if you didn't think it was important.

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Five Stars for Robert Rapier's "Power Plays"

It's a pleasure to have the opportunity to recommend a new book by a fellow energy blogger, especially when the blogger in question has the kind of deep, hands-on industry experience that makes Robert Rapier's work so authoritative.  Robert has been communicating about a variety of energy-related topics for years, first at his own "R-Squared Energy" site, where I encountered him in about 2006, and lately at Consumer Energy Report and at The Energy Collective. You should not assume from the book's title, "Power Plays: Energy Options in the Age of Peak Oil" or the image on its cover that it is just another in a long line of recent bestsellers proclaiming an imminent and permanent global oil crisis.  Robert's description of the risks of peak oil is nuanced and balanced, as is his assessment of the many other timely subjects included in the book.  The chapter on "Investing in Cleantech" is worth the price of the entire book for would-be inventors and investors, as well as for those setting or administering government renewable energy policies and programs. 

In some respects this is the hardest kind of book for me to review.  It covers much of the same territory as my own writing, drawing on similar educational and career experiences, so I'm hardly representative of its intended or ideal audience.  It is also very close to the book that I've long been tempted to write, myself, after well over a thousand blog posts on the same set of topics and issues.  With those caveats, I enjoyed reading "Power Plays", mainly because despite superficial similarities, our perspectives are still different enough that I found it thought-provoking.  I even picked up a few new facts.  And I should make it very clear that although the book certainly reflects the large body of writing Robert has produced over the last half-dozen years or so, it does not read like a collection of recycled blog posts.  It is also as up-to-date as any project like this could be, including assessments of the Keystone XL pipeline controversy, the Fukushima nuclear disaster, and other recent events.

"Power Plays" is structured as an overview of the complex set of energy sources and applications in use today, including their intimate connection to domestic and geopolitics.  (The book includes a sobering, non-partisan analysis of the efforts of eight US presidents to promote energy independence.)  It is also based on an explicit point of view about the need to reduce our dependence on fossil fuels and to attempt to mitigate human influence on climate change, while being exceptionally realistic about our available options and likely success.  Robert has definite ideas on energy policies that would be useful, particularly in guiding our long transition away from oil.  I don't agree with all of them, but they're well-reasoned and well-articulated. 

The book is also very sound on the facts.  I didn't spot any notable errors, with the possible exception of a brief explanation of why hybrid cars are more efficient than conventional cars--in my understanding this derives from the optimization of engine output and the recycling of energy otherwise lost in braking, rather than from inherent differences in energy conversion efficiencies between electric and combustion motors.  Otherwise, aside from the natural differences of interpretation one would expect, Robert delivers 250 pages of straight talk about energy.

One word of warning along those lines: If you come to this book as a firm and uncritical advocate of any particular energy technology to the exclusion of most others, you should prepare either to have your feathers ruffled or find yourself questioning some of your beliefs.  That is particularly true for renewable energy and biofuels, which constitute Robert's current main focus as Chief Technology Officer of a forestry and renewable energy company.  On the other hand, if you'd like to learn more about why fuels like corn ethanol are less-than-ideal substitutes for oil, and why cellulosic biofuel is more challenging to produce and scale up than the promoters of many start-up companies would like you to think, this is a great place to start.  And in addition to the obligatory assessment of vehicle electrification and electric trains, his chapter on oil-free transportation features a serious discussion of bicycling and walking, something it might never have occurred to me to include.  All of this is handled with rigor, ample references, and a leavening of tables and graphs that shouldn't overwhelm those who are more comfortable with words than numbers or data.

I highly recommended "Power Plays" for my readers.  It is available in print and e-book formats from Barnes & Noble and Amazon, where it has garnered exclusively five-star ratings at this point.  I intend to post my own five-star review there when time permits. 

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State of the Union: "All-Out, All-of-the-Above Energy"

Anyone expecting the announcement of big new energy initiatives in this year's State of the Union address was disappointed last night. What was new, however, was a welcome shift in the President's emphasis on conventional energy--the fuels he referred to as "yesterday's energy" in last year's speech. Never mind that the resurgent oil production for which Mr. Obama took credit is demonstrably the result of events and policies that preceded his inauguration, or that his administration has pursued policies that have held back faster development. If his remarks signal a return to federal energy policy that expends more than 10% of its effort on the sources that account for more than 80% of the energy we use, we should applaud him. The other new ingredient last night was an effort to ground the rationale for greater support for renewable energy in the argument that it took federally sponsored R&D to make the shale gas revolution possible--R&D that ironically wouldn't have occurred under the research priorities this President has set for the Department of Energy. I hope President Obama is serious about an "all-out, all-of-the-above strategy" for energy, because that's precisely what we need.

The best way to put that in perspective is with the figures in the 2012 Early Release of the Annual Energy Outlook from the Energy Information Agency of the DOE. It was released just in time for the President's speech, and there are few coincidences in today's Washington. The reference case of their forecast for 2035 shows the US consuming 10% more energy within 24 years--an improvement from the 16% predicted in last year's Outlook. It also shows the contribution of renewable energy in the mix increasing from 6.7% today to 8.3%, including mature hydropower. So even after two more decades of strong emphasis on clean energy, oil, gas and coal would continue to provide 80% of our energy. It's clear that there's a disconnect between the lofty rhetoric of last night's speech and the analysis of the government's energy experts. I'll leave it to you to assess whether the discrepancy is due to unrealistic expectations, inadequately ambitious forecasting, or some combination of the two.

A couple of other points from the State of the Union are worth noting. The President called for Congress to "Pass clean energy tax credits," presumably a reference to the Production Tax Credit (PTC) for wind and other renewables that expires at the end of this year. Yet he didn't devote a word to whether the PTC should be restructured and gradually phased out in light of the steadily narrowing competitive gap between renewable and conventional power, let alone the kind of major tax reform he alluded to later in the speech. Mr. Obama also called for a Clean Energy Standard in lieu of a comprehensive climate bill. This is small beer when most of the states with attractive renewable energy resources already have fairly aggressive state-level Renewable Portfolio Standards. Meanwhile, the development of 3 million homes' worth of clean energy sources on public lands that he is directing his administration to allow equates to less than 1% of US electricity demand--helpful, though hardly transformational.

With little likelihood of a divided Congress enacting much that is new on energy this year, the President's remarks last night are mainly interesting for what they suggest about the energy platform on which he will run for reelection this fall. In terms of clean energy, that seems to mean more of the same from 2008 and the last three years, but with much less emphasis on climate change than we heard in his last campaign. The new element is his pivot to embrace rising oil production and the possibilities created by shale gas, even as he cautiously distances himself from the technologies (hydraulic fracturing and horizontal drilling) that make these two trends possible. Although this might appeal to independent voters, it's also vulnerable to deflation by fact-checking and stands in tension with his rejection--for now--of the Keystone XL pipeline. And if tensions in the Persian Gulf or some other oil hot spot were to increase, so would the scrutiny applied to the administration's energy policies. I'll take a much closer look at those policies when the campaign heats up.

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Playing Games with US Energy Security

Well, that didn't take long. The administration issued its decision denying the Keystone XL Pipeline application today, rather than using the remaining 34 days in the Congressionally mandated timeline to attempt to find a better solution. This is a prime example of what frustrates so many Americans of all political affiliations about how the nation is being governed. If you read the carefully drafted press release from the State Department, which had been given responsibility for determining whether the pipeline was in the national interest, it explicitly states that today's decision was neither final nor on the merits of the project. Implicit in this document is that today's move is exactly that, the latest move in the game that the President and Congress have been playing with a project large enough to affect the energy security of this country for decades to come. It is unseemly, and it didn't have to be played this way, despite the White House's protests that the 60-day timeline was unrealistic--after three years of study.

Here's a different statement the President could have issued, which might not have satisfied either side of the argument but would have left his administration looking like one with a bias for action and answers, instead of delays and obstacles:

"Today I have instructed the State Department to issue a pro forma finding against the application for the Keystone XL Pipeline project, with the clear understanding that this decision is a temporary expedient to provide the time necessary to resolve the remaining outstanding issues, as quickly as humanly possible. I hereby commit that my administration will do everything in its power to work with the government of Canadian Prime Minister Harper and with Governor Heineman of Nebraska to reach a mutually satisfactory solution that will allow this critical project strengthening the energy bonds between our two nations to proceed, while finding meaningful ways to address the concerns that many Americans have about the project's potential local and global environmental impacts. With renewed tensions in the Persian Gulf and with millions of Americans still out of work, we can do nothing less, even as we remain committed to protecting the environment that benefits us all. I have directed Secretary Clinton to work closely with Energy Secretary Chu and EPA Administrator Jackson and with their counterparts in Canada to develop a solution that addresses these needs, and to report back to me within 90 days with its outline ."

I don't diminish the political challenges of issuing such a statement when key parts of the President's support base have been so vocal in opposing this project. All you have to do is look at the latest set of talking points against the project from the Natural Resources Defense Council (NRDC). As disappointingly illogical a mishmash as they may be, based on misinterpreted data and a bizarre defense of cheap oil for the Midwest, they still reflect heartfelt, even visceral, reactions to the Keystone project--or more accurately to the oil sands development that it was expected to enable. Fair enough. I respect their right to an opportunity to provide input and guidance toward an eventual compromise, but not to a veto over US energy policy.

Nor should the opponents of the Keystone XL project fool themselves. Today's decision was guided by expediency, just as the future, possibly quite different decision for which the door was left open would be, perhaps at a point in time when the political calculus has shifted in favor of the project due to some external event. A decision based on principle would have looked quite different. "The Department’s denial of the permit application does not preclude any subsequent permit application or applications for similar projects." Whose move is it now?

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More Long-Term Pressure on Oil Prices

A pair of items in today's Financial Times could signal a longer run of high oil prices, even if Europe were to slip into recession and economic growth elsewhere slow. The first article (registration required) reported that Saudi Arabia has raised its target oil price to $100 per barrel, up from the $75 level that King Abdullah had previously endorsed as "fair." Meanwhile, Venezuela has announced that it would withdraw from a World Bank body for arbitrating contractual disputes, preferring them to be resolved within its own judicial system. That can't be welcome news for companies that had been considering new investments in the country's oil and gas sector. Taken together, these stories suggest both less future supply and a greater likelihood that OPEC would respond to any significant weakness in oil prices by restricting output.

With markets currently tense over the prospect that Iran might make good on its threat to close the Strait of Hormuz, the prospect of Saudi Arabia boosting output if necessary to keep prices from going much beyond $100/bbl must seem welcome, at least in the short term. But as the FT explains, the choice of that figure, rather than a lower one, reflects the fiscal realities of a broad group of Middle East producers. The Saudis, Iran, Iraq, and the UAE all require oil prices north of $80/bbl in order to balance national budgetary requirements. Considering that the cost of producing much of this oil is likely still in either the single digits or low double-digits, that is an extraordinary commentary on just how much these countries depend on oil revenues to fund the social expenditures that maintain their respective domestic status quos. So while Saudi oil minister al-Naimi may have intended his comment to convey a comforting price ceiling, it probably said as much about his government's view of where the floor should be. With UK Brent crude currently trading at roughly the same $111/bbl level that set a full-year price record last year, I'm not sure how many of us would find that reassuring.

The decision by Venezuela's dictator to exit the World Bank arbitration mechanism shouldn't have come as a surprise, with an estimated $40 billion in international claims outstanding for his past actions in nationalizing assets and arbitrarily altering contractual terms in a variety of industries. The recent ruling by the International Chamber of Commerce in favor of an ExxonMobil claim might just have been the final trigger. Yet despite the obvious expediency of such an exit, it seems grossly counterproductive in the context of a producing country that depends increasingly on foreign investment to stem a long-term decline in output. Since President Chavez punished his nation's oil industry by firing its most capable managers and engineers following a strike in 2002-3, Venezuelan oil production has fallen by at least 15%, and it only avoided a larger drop due to the contribution of the big Orinoco production and upgrading projects built by foreign firms such as ExxonMobil, Chevron, ConocoPhillips and Total--some of which are now seeking compensation for expropriation of assets and other grievances.

Requiring disputes to be resolved within a court system that has been stacked with Chavez loyalists hardly seems like the recipe for reducing political risk and reassuring companies that have already seen past investments turn sour. While companies that have too much at stake to leave will try to make the best of this, others would be well-advised to steer clear. However this turns out for the industry, the likely outcome for Venezuela is lower production in the future and even greater support for hawkish price policies within OPEC, to prop up the oil revenues upon which Chavez's redistribution policies depend.

Of course none of this guarantees high oil prices in perpetuity. After all, OPEC was unable to prevent prices collapsing to below $40/bbl in late 2008, though it did restrain output enough to get them back to around $80 within a year. However, both stories should remind us that in a world in which oil prices are set to suit producers better than consumers, our primary focus should be on actions and policies that enhance our energy security. That means substituting plentiful natural gas for oil and its products where we can, promoting conservation and efficiency, pursuing cost-effective renewables, and ensuring that we have access to as much oil from domestic and trusted international sources as possible. Rejecting the Keystone XL Pipeline, instead of committing to find a way to make it work while addressing reasonable concerns about it, would be nothing less than a gift to OPEC.

Disclosure: My portfolio includes investment in Chevron, which is mentioned above and owns projects and facilities that could be affected by these events.

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"Energy Reality"

Earlier today I attended a luncheon and press conference rolling out the annual "State of American Energy" report from the American Petroleum Institute. API's President and CEO, Jack Gerard, also used the occasion to launch a new "Vote 4 Energy" campaign, which he described as a non-partisan effort intended to start a conversation about energy during a key election year. He also touched on a number of issues that are very familiar to readers of this blog, including the Keystone XL Pipeline decision, the need for greater access to US energy resources, along with energy security and jobs. A phrase that Mr. Gerard used in his remarks, and that recurred several times during the press conference, was "energy reality." This struck me as an apt encapsulation for the energy policies that should be addressed by President Obama and whomever his Republican challenger turns out to be, from the shrinking pool of candidates.

I was pleased to hear Mr. Gerard cite the need for a full range of energy solutions, with renewables, nuclear energy and energy efficiency prominently mentioned along with the expected references to oil and gas. That is precisely the energy reality we should be pursuing: tapping the hydrocarbon riches with which the US is endowed, in order to reduce our dependence on unstable foreign suppliers, even as we ramp up the wind, solar, biofuel and other renewable energy sources that must take over the energy burden in the long run, and with all of it used more efficiently than today. Yet energy reality should also take account of the tremendous disparities of scale that still exist between conventional energy and renewables, and that are likely to persist for some time. After a decade of rapid growth, wind power accounted for less than 3% of the electricity generated here last year, and solar for much, much less than that--with neither displacing any meaningful amount of imported oil, since less than 1% of our electricity is generated from oil.

Energy reality came up again in the context of a question about the EPA's Renewable Fuel Standard, which was recently finalized for 2012 to require the use of 8.65 million gallons of cellulosic biofuel--a reduction of 98% from the 500 million gallons previously specified for this year in the RFS enacted by the Congress in 2007. Biofuel from corn, soy and animal fat has expanded to contribute nearly 10% of the US gasoline supply and a smaller fraction of diesel fuel. However, a law requiring the use of advanced fuels that don't yet exist in commercial quantities--and may not for many years--and forcing refiners to purchase credits in place of these non-existent gallons is certainly out of touch with objective energy reality and ultimately constitutes another tax on consumers.

I would argue that the decision that the President now has less than 60 days to make on whether to allow the Keystone XL Pipeline to go ahead also hinges on his understanding of energy reality. He must choose between the urgent concerns of employment and energy security articulated repeatedly in Mr. Gerard's answers to numerous questions on the subject, and an objective assessment of the environmental impact it might cause. Stripping away the various red herrings that sprang up in the course of the debates and protests over the pipeline, the latter boils down to the incremental greenhouse gas emissions from the extra oil sands production that the pipeline would facilitate, compared to the emissions from the conventional crude we would otherwise have to import from the Middle East or elsewhere. I've seen some wild exaggerations about that, including the doozy I ran across over the holidays from former Vice President Gore, to the effect that a Toyota Prius running on fuel refined from oil sands crude would have emissions equivalent to a Hummer. (When you do the math, it actually works out to the equivalent of a Ford Fusion hybrid.) In fact, the incremental emissions at stake in the Keystone decision amount to around 0.3% of total 2009 US emissions. That's the basis of the trade-off Mr. Obama must make, and no matter which side he chooses he will infuriate those supporting the other side.

As the 2012 presidential election approaches, I expect to find many opportunities for comparing campaign rhetoric to this kind of energy reality barometer. Elections tend to focus on the differences between candidates, and I have little doubt that the differences on energy will be significant. However, when the dust settles on November 7th it will be high time to start work on a new bi-partisan consensus on energy policy that might actually survive the next change in administrations, unlike the disruptive pattern we've been in for the last five cycles or so. Not reality? Perhaps, but certainly worth aspiring to. Happy New Year!

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2011 in Energy: The Year of...

At the start of 2011, I thought the hallmark of the year's energy events and trends might involve regulation, with the White House seeking to implement measures that couldn't garner enough support in Congress to become laws. But for every major new regulation issued, such as last week's release of the new Mercury and Air Toxics Standards for power plants, others were delayed or deferred, including the EPA's effort to regulate greenhouse gases under the Clean Air Act and the agency's proposed ozone standard. Outside of the utilities and other industry groups directly affected by these rules, it seems likely that 2011 will instead be remembered for big, unpredictable events like the Fukushima nuclear accident and the Solyndra bankruptcy scandal, along with several major trends that reached critical mass this year. Anyone attempting to pick the energy story of the year is spoiled for choice.

In my search for a catchy title for this year's final posting, I toyed with "The Year of Solyndra", "The Year of Shale", "The Year of Fukushima", "The Year of Exports", and various other combinations of the energy buzzwords that percolated into our consciousness this year. In some ways, they'd all be apt choices. Here's a quick rundown on why they might merit that kind of recognition, with links to previous postings providing more details on each:

• If 2011 is the year of Solyndra, it's not because of the possibility that the government's $535 million loan to the firm was the result of political influence (cue Major Renault), or even that the Department of Energy is unlikely to recover more than pennies on the dollar in the firm's bankruptcy. Instead, it's because Solyndra highlighted the much broader and deeper problems of a global solar industry that, despite continued demand growth that other industries would kill for, now faces overcapacity and the fallout from the winding down of unsustainable government support. Germany's Solar Millennium is just the latest victim of this trend. Along with BP's exit from the solar business after 40 years, it provides a further reminder that renewable energy firms must succeed not just as technology providers, but as businesses that can earn consistent profits and continue to attract investors.



• Shale gas was hardly new to the scene in 2011; it has been expanding rapidly for several years and now accounts for up to a third of US natural gas production. However, the controversy surrounding drilling techniques like hydraulic fracturing that make its exploitation possible became much more widespread this year, while some scientists raised questions about its contribution to greenhouse gas emissions. Shale gas has the potential to transform nearly every aspect of our energy economy, and probably sooner than renewable energy sources could. That has some folks nervous, while others are eager for shale gas to displace coal from electricity generation, compete with oil in transportation, and revive the domestic petrochemical industry. I suspect we'll see all of those to some extent, provided we don't regulate shale out of the running.



• The aftermath of Fukushima could prove equally transformational, though it remains to be seen whether the ultimate result is safer nuclear power or a global retreat from one of our largest sources of low-emission energy. All but 8 of Japan's 54 nuclear power plants are currently idle, and that nation must shortly decide whether it will eventually restart those units that weren't critically damaged, or shut down the rest and attempt to run its manufacturing-intense economy on a combination of renewables and much larger imports of fossil fuels. The German government's post-Fukushima decision to phase out nuclear energy entirely could provide an even quicker test of the same proposition.



• Another major shift that has been in the news recently involves exports. Although the US has long exported coal and various petroleum products, we could shortly become a bigger, more consistent exporter of many fuels, including liquefied natural gas (LNG), gasoline and diesel. As the reaction in a CBS news segment last week demonstrated, the US public doesn't know quite what to make of this, yet. Becoming a major energy exporter while still importing a net 9 million barrels per day of crude oil is very different than the picture of isolated self-sufficiency that four decades of "energy independence"rhetoric has evoked. We shouldn't be surprised that energy can provide a boost, and not just a drain on our trade balance. This topic requires more public discussion and education, before we see serious proposals to ban such exports--proposals that would make no more sense than banning exports of corn, tractors, or aircraft in an attempt to keep their US prices low.



• It's also tempting to call this the Year of Oil Price Confusion. The news media gradually woke up to the huge gap that had developed between global oil prices and the oil price that Americans tend to watch most closely, the one for West Texas Intermediate crude. Yet despite numerous stories on the storage and pipeline crunch and supply glut at Cushing, Oklahoma, few reporters and networks seemed able to follow through by breaking their old habit of treating the NYMEX WTI price and its gyrations as if it were still the best indicator of the overall oil market. Fortunately, the problem is in the process of being resolved, as pipelines are reversed and more tankage built.



• Finally, there was the administration's non-decision on the Keystone XL pipeline. Observers can read much into this, including the growing influence of citizen activists mobilized via social media. However, if it does nothing else, the Keystone controversy should put to rest the superficial fallacy that anything that improves greenhouse gas emissions is automatically good for energy security, instead of requiring difficult trade-offs. In that context, the prospect that the administration might ultimately turn down the permit for Keystone would be easier to stomach if the net greenhouse gas savings involved amounted to more than a paltry 0.3% of annual US emissions, based on the emissions from incremental oil sands production the pipeline might facilitate, compared to those from the conventional imported oil it would displace.

It was a busy year for energy, and if my short list of top stories missed something crucial, please let me know. 2012 promises to be just as interesting, with a Presidential election, in which energy issues could feature prominently, added to the mix. In the meantime, I'd like to wish my readers in the UK and Commonwealth a happy Boxing Day, and to all a Happy New Year.

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Breaking Our Oil Addiction

In an article in today's Washington Post an official of the National Wildlife Federation was quoted linking rejection of the Keystone XL pipeline with breaking our addiction to oil. Even with the administration apparently having delayed its decision on the project until 2013--quite possibly killing it--this point merits further exploration. Just how might we go about breaking that "addiction", and when could we reasonably expect the task to be accomplished? As with everything else to do with energy, the answers to those questions must be based on facts and figures, rather than wishfulness.

The brief quote and its context imply that a decision to forgo additional supplies of oil from Canada or any other source would, by itself, move us significantly closer to breaking our addiction to oil, a rather vague phrase brought into common usage by President Bush's 2006 State of the Union address. Of course if delaying or rejecting the pipeline only results in continued or additional oil imports from other countries, that would be counterproductive from an energy security standpoint, and perhaps even from an environmental perspective. Ending our oil addiction requires more than just a real or artificial supply constraint; it calls for enormous quantities of energy from other sources, mainly for transportation, along with significant improvements in the efficiency with which we use that energy. How soon should we expect such a transformation?

Start with electric vehicles, which are essentially the only pathway by which renewable electricity sources like wind, solar and geothermal power would have any impact on our oil consumption, because less than 1% of US electricity is now generated from oil. Even if EVs turn out to be the long-term solution to our transportation needs, as I suspect, it will be many years before they can displace enough fuel demand to make a dent in our oil addiction. The current goal is to have a million EVs on the road by 2015. As ambitious as that target seems compared to current sales of less expensive hybrid cars, that would constitute just 0.4% of the 238 million cars and light trucks in the US as of 2008. Moreover, even if EVs replaced cars of only average efficiency, one million of them would displace just 31,000 barrels per day of gasoline. In other words, it would take more than 20 million EVs to save the volume of oil that the Keystone Pipeline could have delivered annually.

If we want to kick our oil habit quicker than by waiting for a hundred million EVs to turn up, we'll need an energy source that's compatible with the vast majority of existing cars, and the ones like them that will probably dominate new car sales for some time. Consider ethanol, our largest and most successful alternative energy initiative so far. Through August, ethanol accounted for 9.2% of 2011 US gasoline consumption, nearly four times its contribution in 2005. However, before we could use a lot more ethanol in our cars, in the way Brazil has, we would need to overcome some big hurdles. Raising the proportion of ethanol in gasoline above 10% creates logistical and reliability problems, and the flexible fuel vehicles that can run on nearly pure ethanol are relatively scarce. In addition, we would need to produce most of the incremental ethanol from a feedstock other than corn. With the latest disappointing crop forecast from the US Department of Agriculture, ethanol production will consume about 41% of this year's harvest. Whether or not that's already enough to cause major food vs. fuel concerns, doubling corn use for ethanol would clearly push corn prices up drastically and cause ripple effects throughout the global food economy.

The good news is that biofuels--including better fuels than ethanol--can be produced from a wide variety of non-food crops, along with their efficient production from sugar cane in the tropics. The bad news is that with the exception of cane ethanol, none of these has been demonstrated on anything close to the scale required. Two of the largest cellulosic ethanol projects under construction, POET's Emmetsburg, Iowa project and the Vero Beach, FL facility of INEOS Bio, will together be capable of supplying just 0.02% of US vehicle fuel needs. And until these plants are up and running, their owners won't know whether their economics are sufficiently favorable--even with the current $1.01 per gallon cellulosic tax credit--to provide a basis for building more and larger versions. Although some of the many competing processes for producing biofuels from non-food biomass including wood, waste, dedicated energy crops and algae look very promising, they all face major uncertainties in development and scaling-up, including the scale-up of their supply chains, and none is yet ready for prime time. That might still be the case ten years from now.

Of course there are many other fuels we could put in our cars, after some modifications, including methanol, compressed natural gas (CNG), liquefied natural gas (LNG) or possibly even ammonia. However, the production of all of these, aside from a relatively small amount of landfill gas, is currently based on fossil natural gas, and all would require major investments in infrastructure and/or vehicle fleets. For that matter, 78% of the energy content of corn ethanol comes from natural gas and other fossil fuels--it also consumes enormous quantities of water--and most of the incremental electricity consumed by the first EVs will likely be generated from gas.

Although it appears that we have ample resources of natural gas to expand its use beyond current demand, I'm not sure that's quite what environmentalists have in mind when they talk about breaking our addiction to oil. And so far we've only considered alternatives to gasoline, without factoring in the significant demand for petroleum products for moving goods by truck, train and ship, along with aviation fuels, lubricants and many other products. Together, they account for as much oil as we use in cars, with non-oil alternatives for most of them at an earlier stage than for gasoline. And while energy efficiency measures, including the substantial improvements in vehicle fuel economy that are possible on a technology-neutral basis--including shifting cars to fuel-efficient diesels--can help to reduce the size of the mountain we must climb, they can't turn it into a valley.

Taking all these considerations into account it's not realistic to imagine that we could break our addiction to oil to any great extent for at least another decade. In the interim, we should certainly pursue all options that could alter the feasibility of such a shift in the years ahead, in a manner consistent with the fiscal constraints we face. I'm also not oblivious to what that implies for greenhouse gas emissions and climate change, though I would point out that our use of oil in transportation is neither the worst emissions offender, nor the easiest high-emitting segment of the US energy economy to tackle in that time frame. In the meantime, we are committed by virtue of scale, infrastructure and fleet requirements to burn many billions of barrels of oil over the next few decades, from wherever they may come. In that light, the administration's decision on the Keystone XL pipeline could prove to be a costly misstep, no matter how much political pressure they were under to withhold approval.

Addendum: Bloomberg has put out an interesting post-decision editorial suggesting that there's no reason for the review of an alternate pipeline route to take as long as the State Dept. has indicated.

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Pipelines in the Spotlight

There aren't many parts of the energy value chain that normally receive less attention than pipelines. Energy production, whether from oil and gas fields, nuclear power plants, or rapidly growing renewable sources usually garners far more attention for the impressive technology and capital involved. By contrast pipelines are long-lived, relatively low-tech and low-return assets that often seem invisible to those outside the industry. Sunday's announcement of Kinder Morgan's bid for El Paso Corp., uniting two pipeline giants into a $94 billion enterprise, reminds us just how big this low-key infrastructure can be. This deal also signals important shifts underway within the fossil fuel industry. Just as the rise of wind and solar power requires an upgraded electricity grid, changes in the sources of our oil and gas have big implications for the networks required to bring these fuels to market.

As an article in today's Wall St. Journal states in its title, the Kinder Morgan-El Paso deal heralds the arrival of the Age of Shale. It simultaneously validates the potential of US shale gas resources and points to a new set of growth opportunities created by unconventional oil and gas resources that couldn't have been produced a decade ago, either economically or technically. This couldn't have come at a better time for the pipeline industry, when its bread-and-butter business of transporting refined products to distribution terminals is reaching a plateau, as developed-country markets exhibit Peak Demand and biofuels output grows. That's a big change from when I worked in the "mid-stream", which includes pipelines, distribution terminals and trading. Then, the challenge was keeping conventional crude pipelines full as domestic onshore oil fields depleted, while expanding capacity to transport gasoline, diesel and jet fuel to meet steadily rising demand. Today the advent of shale gas, shale oil and oil sands crude coincides with the development of a much more diverse energy market.

Recent changes in the economy also make pipelines, which used to be considered dull, more interesting as an investment. With interest rates historically low and equity markets weak and volatile, the modest but stable returns that midstream oil and gas assets offer must seem a lot more attractive than they did prior to the financial crisis, particularly when managed in tax-efficient structures such as the master limited partnerships that Mr. Kinder helped pioneer. And those same low interest rates make the capital required for new private-sector infrastructure projects more affordable. Such projects also look doubly beneficial in the current environment of high unemployment, providing both large numbers of jobs in the short term, during construction, and ensuring the reliable energy supplies needed for sustainable job growth once the economy hits its stride again.

Of course pipelines aren't always dull, particularly when they are the focus of controversies such as the current one concerning the proposed Keystone XL Pipeline. But what many of that project's critics, including celebrities who appear to know less about such facilities than most of my readers, have missed is that despite rare, unfortunate accidents, pipelines remain the best and most efficient means of transporting large volumes of fuel over long distances. Unless you honestly think we can do without these fuels entirely--a scenario that I am convinced will not be realistic for at least another few decades--then it makes little sense to shun pipelines and thus proportionally increase the quantity of fuel that will be carried by truck, rail and ocean-going tankers, all of which are also subject to accidents. Like all infrastructure pipelines require proper maintenance, but they are not inherently risky.

No bet on the scale of the one Kinder Morgan is making can ever be a sure thing, and I can think of several things that might go wrong, topped by a double-dip global recession that lasted for years and sapped both energy demand and gas drilling economics. However, this deal taps into a number of converging trends supporting a US natural gas boom that is part and parcel of the potential global Golden Age of Gas that the International Energy Agency recently described. I wouldn't be surprised to see more transactions along these lines.

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Turning to Energy for Jobs

Yesterday's Energy Jobs Summit at the US Capitol, hosted by The Hill and API, focused on the potential of the energy sector to add large numbers of new jobs to help alleviate the national jobs crisis that President Obama will discuss in tonight's speech. The figures presented by API and others were impressive, with the oil and gas sector alone capable of creating over a million jobs if provided increased access to US resources. Panelists also discussed "green jobs", including those from energy efficiency projects. Yet I was struck by the inherent tension between today's job-creation imperative and our long-term need for an energy sector that is as productive and cost-effective as possible, in order to support economic growth and reemployment in the roughly 92% of the economy beyond energy. That makes highly productive private-sector energy jobs requiring little or no public investment especially valuable.

In a new study released at the summit, Wood Mackenzie estimates that the US oil and gas industry could increase its employment by 1.4 million by 2030, with a million of those jobs attainable by 2018--more than half in the next two years--under new policies that would lift the current bans on offshore drilling outside the established areas of the Gulf of Mexico and on shale drilling in New York, speed up permit issuance in the Gulf, open up new onshore acreage for leasing, and approve the Keystone XL pipeline. In the process, domestic production of oil and gas liquids could eventually nearly double, while natural gas output would grow by over 60%. Even better, from a deficit-and-debt reduction perspective, this effort would require no new government expenditures and stands to contribute a cumulative $800 billion in additional federal and state royalties and tax receipts.

The potential jobs impact is extraordinary, when you think about it. Oil and gas is an incredibly capital-intensive industry with very high worker productivity--one reason that salaries in the industry tend to be much higher than average. An industry like that is hardly the first place one might think to look when seeking massive job growth. The fact that such growth is even possible is both a validation of the tremendous untapped resource potential we still possess, and an indictment of decades of bipartisan energy policy mismanagement that has preferentially outsourced US energy production, rather than exploiting our own resources.

What about the contribution of "green jobs"? The growth of cleantech--renewable energy and energy efficiency--can certainly contribute to US job growth, yet we should understand clearly that such jobs won't spring forth spontaneously from the private sector without substantial continued government incentives and subsidies. Nor are those a guarantee of success. The US wind industry installed just 2,151 MW of new capacity in the first half of 2011. While that was considerably better than last year's pace of 1,250 MW, it's still 47% below installations in the first half of 2009, despite last December's against-the-odds extension of the Treasury renewable energy grants, which paid out $2.2 billion to wind projects this year. And the recent solar bankruptcies and the aggressive offshoring by solar manufacturers fighting to stay competitive with Asian suppliers also demonstrate that green jobs, other than those in installation and construction, are just as vulnerable to global competition as in any other US manufacturing industry.

Conventional energy jobs aren't immune from competition, either. I was startled to read yesterday that regional refiner Sunoco plans to exit the refining business after more than 100 years. Its two Philadelphia-area refineries will either be sold or shut down by mid-2012, with 1,500 jobs at stake. Prospects for a quick sale of these facilities look poor, because these plants are among the most exposed to global oil prices that have been running more than $20 per barrel higher than for crudes produced in Canada and the US mid-continent. Idling these plants would take a big bite out of east coast gasoline supplies and inevitably lead to both higher product imports and higher gasoline prices in the northeast and mid-Atlantic regions. As someone pointed out at yesterday's session, it's a sad commentary that Sunoco can make more money selling sodas and snacks at its retail facilities than it can refining crude oil.

That dynamic makes the production-related jobs in the Wood Mac study even more attractive: Despite being tied to a depleting resource, US oil & gas exploration and production enjoys a greater sustainable competitive advantage in the global marketplace than either refining or cleantech manufacturing, at least when it has sufficient access to domestic resources.

However, these opportunities also pose a test of our seriousness on the jobs issue. Opening up the Virginia and California coastlines, for starters, along with the coastal plain of the Arctic National Wildlife Refuge to exploration raises a host of NIMBY and environmental concerns. I don't want to trivialize them, but I would suggest that the time when we could afford such sensibilities may have passed, heralded by our continued descent in the rankings of national global competitiveness and the rapid growth of our indebtedness. Creating a number of "green jobs" comparable to Wood Mac's estimate of 1.4 million from oil and gas would require the expenditure of tens to hundreds of billions of dollars the federal government doesn't have, and that the current Congress seems unlikely to be willing to appropriate. It would also risk embedding expensive energy at the core of the US economy, hobbling our non-energy economy, where most Americans are employed.

Yesterday's energy jobs summit was held in the new Capitol Visitor Center, which I hadn't seen before. It's a gorgeous facility and a suitable addition to the paramount edifice of our democracy. However, I was also struck by the contrast it provided with the meeting's subject matter. Recall that the Visitor's Center ended up costing over $600 million, well over twice its original plan. I hope that when the President presents his jobs program tonight, it will be grounded in the crucial distinction between that kind of government-funded, "shovel-ready" project that might put some of our fellow citizens back to work for a few years and an energy-and-jobs resurgence funded entirely by companies and their investors.

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Oil Sands Anxiety Is Overblown

As I was catching up on a two-week backlog of news after my vacation, I ran across a New York Times editorial with the promising title of "Tar Sands and the Carbon Numbers." Thinking that perhaps the Times might have woken up to the necessity of comparing the lifecycle emissions from oil sands to those from other crude oils, I was disappointed to find its editors perpetuating the common misunderstanding concerning these emissions when viewed only from an oil-production perspective. That's a shame, because it results in the scape-goating of Canadian producers and pipeline companies while conveniently avoiding the soul-searching that ought to accompany a clear understanding that, whether we're talking about oil sands or conventional oil imported from any other source, the vast majority of the lifecycle emissions will occur here, when the products into which these oils will be refined are consumed. It is also condescending toward the sovereign responsibility of our NAFTA neighbor for managing their national emissions under the Kyoto Protocol, which they ratified but we didn't.



The pending State Department review of the proposed Keystone XL pipeline project linking Alberta's oil and oil-sands projects to Gulf Coast refineries has become a hot-button issue for US environmental groups. Producing oil from oil sands, which were more commonly called tar sands until that became a term of disparagement, certainly involves more environmental consequences than most--though not all--conventional crude oils. Since US groups haven't been very successful targeting the oil sands projects in Alberta, where they contribute significantly to Canada's oil output and overall economy, the export pipeline has become a target of convenience. From my perspective, the angst about pipeline safety and acidic bitumen is mainly a red herring; the oil industry routinely handles other crude oils of similar sulfur levels and acidity, usually by adjusting the metallurgy of the pipes and vessels involved. The real issue here is greenhouse gas emissions, which the Times and most other critics of oil sands narrowly compare to those from producing conventional oils.



The Environment Canada report cited by the Times indicates that oil sands production and upgrading result in emissions about 70% higher per barrel than for the production of Canada's average conventional oil. That's in the range of other estimates I've seen. However, what the Times fails to mention is that such "upstream" emissions only account for a fraction of the total lifecycle emissions attributable to any oil. By far the biggest portion--even for oil sands--comes from the combustion of petroleum products by end-users.



So if at least 70% of the emissions from oil sands crude occur in the US, rather than Canada, and if the lifecycle (well-to-wheels) emissions from oil sands only average around 15% higher than for the average US refinery's crude slate, while emitting little or no more than some commonly imported crude oils from other countries, are the XL pipeline's opponents exaggerating its impact? I believe they are, unless they're also willing to take on imports of consumer goods and other products from higher-emitting countries like China. That would be difficult to justify to the World Trade Organization, considering that the US doesn't have a statutory limit on its own greenhouse gas emissions. It might also put us in an awkward position with regard to our exports to countries that have adopted strict emissions reduction targets.



Meanwhile we shouldn't forget that under UN agreements it is Canada that bears responsibility for the extra emissions that oil sands generate in Alberta. The Environment Canada report indicates that oil sands are likely to contribute 11.7% of Canada's GHG emissions by 2020, up from 6.7% in 2005, when Canada's share of global GHG emissions stood at less than 2%. The expected increase in oil sands output would account for essentially all of the projected 7% rise in Canada's emissions over that interval, an amount equivalent to 0.1% of current global emissions. The means by which Canada could address those incremental emissions include improved technology, offsetting cuts in other sectors, emissions trading and offsets purchased from other countries, or the Canadian government could simply choose to restrict oil sands output. Whatever path they choose, we have plenty of our own emissions to consider without going into a tizzy over a Canadian sector that currently emits roughly as much as US livestock waste management.



Trying to control the emissions from oil sands by blocking this pipeline is a perfect illustration of the difficulty of attempting to tackle a complex global environmental problem by focusing on isolated measures that only bear indirectly on the outcomes that matter. The weakness of the Times' argument is reflected in the following sentence, referring to Canada's policies: "The United States can't do much about that, but it can stop the Keystone XL pipeline." The implication seems to be that we would be better off if Canada exported its oil sands to developing Asia, their next best market, relieving us of any associated guilt, even if it made no actual difference in global emissions. I hope that when the State Department decides this matter, it gives appropriate weight to the fact that, other than fuel economy improvements in the US car fleet, our energy ties with Canada represent the single most effective energy security measure undertaken by this country since the oil crises of the 1970s.

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What's the Alternative to Oil Sands?

I can recall when technologies like oil sands and coal gasification were commonly referred to as alternative energy, with the same high-tech aura now attached to solar power and advanced biofuels. Much has changed since then, not least our perspective on climate change and the greenhouse gases that contribute to it. It's no longer possible to consider Canada's oil sands production and the means of transporting it without a serious examination of the environmental consequences, both at the source and along its journey to market. However, while I understand that perspective, the reaction to the proposed Keystone XL pipeline seems disconnected from the reality that crucial supplies of Middle Eastern oil suddenly look much riskier than they did. We should certainly weigh the costs and benefits of oil sands carefully, but the missing element from this conversation is the question of what the alternative would be if we ruled out more oil sands imports.

This train of thought began with a sobering analysis of the energy implications of the unrest in the Middle East by Amy Myers Jaffe of the Baker Institute at Rice University in Houston. The challenge she highlights is much subtler than the risk of exports from countries like Libya being disrupted for a few months or even a few years. Existing spare capacity in other producing countries can cope with some of that, although a portion of that capacity is in other countries that could be just another domino or two down the road, while the rest is in Saudi Arabia, which might not be immune, either. Yet if the worst case is the disruption of exports, we have a substantial Strategic Petroleum Reserve to fall back on. Prices might rise significantly, but the prospect of no fuel at your local gas station at any price remains remote for now.

However, as Ms. Jaffe demonstrates, much of the incremental oil production capacity on which forecasters have been relying to meet additional oil demand over the next two decades, and to backstop declining production in non-OPEC countries, must come from the same region that is now in turmoil. And as the charts in her presentation show, revolutions--democratic or otherwise--rarely result in higher oil output. If new governments or chastened existing governments don't invest in developing that extra capacity, then Peak Oil won't just be a theoretical construct in geology; it will be a very real outcome in geopolitics, and one that strategic inventories like the SPR would be unable to mitigate.

We have had a tendency to view Canada as the Saudi Arabia of the north. Considering that we now receive more oil from there than from all the countries of the Persian Gulf combined, and that our NAFTA partner's proved reserves of 178 billion barrels are second only to those of the Kingdom, that's not unreasonable. As recently as 2002, though, Canada's oil reserves were under 6 billion barrels, before the oil sands could be booked as reserves in large quantities. Without its oil sands, Canada would be just another mature oil province with declining conventional output. The question of how rapidly to develop those resources, and whether to export their output outside North America to any significant degree, is currently a hot topic in Canadian politics. The pipeline to transport this oil to Kitimat, British Columbia for export to Asia seems to be subject to a similar debate to the one we're having in this country concerning the Keystone XL line from Alberta to the Gulf Coast. But what if these projects didn't go forward? A world without oil sands might have a little less in the way of greenhouse gas emissions, but it would also have much higher oil prices, and those prices would be more volatile.

So what are the alternatives to these "dirty tar sands", as environmentalists now invariably refer to them? Well, if you're been reading my blog for a while, you know that wind and solar power don't enter into this discussion, because very little electricity is used for transportation and very little oil is used for generating electricity, outside of the developing world and now post-Tohoku Quake Japan. If we don't have access to oil sands imports, then the only other near-to-medium term options for reducing our oil imports from less stable suppliers involve more domestic oil production, more efficient vehicles, and more biofuels production.

Unfortunately the latest Department of Energy forecast incorporating all of those options still leaves us importing nearly 9 million barrels per day of oil in 2025. Without a significant portion of it coming from Canadian oil sands, we will still be forced to rely on imports from places like Venezuela and the Middle East, some of which aren't much more environmentally sound than the oil sands production. And that assumes that all the domestic production in these plans actually materializes. Turning up our noses at both offshore drilling and oil sands is pretty much mutually exclusive. (Or for that matter, shale gas and oil sands, even though these are different forms of energy.)

As for biofuels, we've already got just about as much corn ethanol as we can handle for many reasons, and the more advanced variety has not been especially cooperative in turning up on schedule. Replacing the oil sands capacity that the proposed Keystone XL pipeline could deliver would require more than 23 billion additional gallons per year of ethanol, or 180% of last year's US ethanol output. That figure exceeds the entire 2022 cellulosic and advanced biofuel target under the federal Renewable Fuels Standard. Biofuels are an important part of our energy mix, but the time when they could make oil sands crude unnecessary is still a long way off.

Americans are conflicted. We complain about $4 gasoline, and we're uneasy about another military intervention in the oil patch of the Middle East and North Africa, but then we throw obstacle after obstacle in the path of one of the few options that can provide us with a larger supply of reliable fuel from North America. No matter how sympathetic I am with communities that don't want the new pipeline to pass through or near them, or with concerns about the 17% increase in lifecycle greenhouse gas emissions that oil sands represent, compared to conventional oil, closing our border to additional imports of oil sands crude can only undermine US energy security, at the worst possible time.

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