API and some thoughts on America's Energy Future

There seems to be a little drop in the intensity of the debate over the arrival of Peak Oil. Given that crude oil prices are hovering around $100 a barrel, and quite likely to go higher over the course of the year, it is perhaps only the recent history of oil at $147 a barrel that stops a more intense debate. After all we have been there - done that, before so why worry? Unfortunately this may be the lull before the storm.

Consider that there has been a change or two, even in the short period of time since our last visit to this price range. Last time it was possible to see an increase in production from places such as the United States, and from Russia. Not huge amounts, but symbolic, that production could respond, somewhat to a potentially more expensive product. But this time around it is likely that we will see both United States and Russian production fall this year, even as prices rise. And with a certain complacency evident in the politicians, whose constituents are now paying higher prices for product, things that might be properly done to at least help out, are not seen as that important at the moment.

The API addressed this issue, at the beginning of the year, through the speech of Jack Gerard, their President. Looking at the “State of American Energy”, he was able to point to the number of new jobs that the industry has been able to create both with the development of the Marcellus gas shales in the East, and with the Bakken developments in the North West. He also pointed to the $95 million in taxes, rents, royalties and bonus payments that the Treasury gets from the industry each day. The totality of current jobs was counted as 2.1 million directly employed in the oil and gas industry and 7.1 million in the affiliated industries that work to support it.

Yet, as he noted,

Over the past few years, revenues to the U.S Treasury from lease sales have decreased, due in part to a lack of opportunities.

Our industry is eager to initiate new projects. But without an adequate level of business certainty, with concerns about policies that might curtail this industry’s ability to access new resources, those projects might never get off the drawing board

Part of that uncertainty comes from the changes in regulation that will control drilling offshore from the United States. Some rigs that could have continued to drill in the GOM, but were halted after the Deepwater Horizon disaster have now moved abroad, and may be gone years before they return to American prospects. But until there is a clear commitment to facilitating American production, that exodus may well continue. The severity of the coming crisis is still not evident in the eyes of the politicians and the general public. Further, as the price of oil rises, it is assumed that the wealth of the companies producing the oil is also increasing, and so (despite rising costs that are not mentioned nearly as often) it is assumed that companies can afford higher payments. And with new quarterly and annual profit statements coming out soon, it is going to be a little difficult to defend that position against what is quite likely to be a set of overall record, or close to record, earnings. Even BP had returned to profit at the end of the 3rd Quarter of 2010.

The fact that they are playing in a shrinking sandbox, as producing countries take over more and more of the profit generating parts of production is not seen as a concern.. Yet, as we have seen in places such as Venezuela, the results of government involvement is quite often to reduce the level of investment in the industry, just as investment costs should, in reality, increase to allow discovery and development of the more difficult reserves that will be needed in the future.

As the Venezuelan experience shows “Twenty billion here, and twenty billion there, and soon they are talking real money,” (to misquote Senator Dirksen). And yet those monies are likely to be inadequate to properly develop the resources of that country. Jack Gerard seems the future in the further development of the gas shales, in increasing production from the Canadian oil sands, and in the development of a significant oil shale industry.

At the present there is too much natural gas available for the growth of the gas shale industry to be assured over the next five years. This is not because of the problems that are being stirred up over the chemistry of the fracking fluids, nor the ability of the companies to properly protect the ground water around the sites, those issues have realistically been solved decades ago, and the furor will die away in time. The problem at the moment relates more to the cost of developing the reserves at a time when the market has natural gas available that is cheaper than can be extracted from some of the gas shale wells. And as long as that holds true the industry is unlikely to grow much.

One thing that API did not mention much in the speech, but which came later, in one of Jane Van Ryan’s blog posts, is a valid concern over the march toward E15, that is the use of 15% ethanol in gasoline. That original target was predicated on the assumption that, by now, cellulosic ethanol would be at or close to large-scale commercial production. Well that has not proved to be the case. EPA backed off a little on the targets last year, as Robert Rapier noted at the time. More recently he has drawn attention to the failure of the Range Fuels plant in Soperton GA , which is now closing. After spending $320 million, and producing one batch of ethanol, the company needs more money to solve technical issues.

As far as the national target is concerned:

Congress initially set 100 million gallons as the 2010 target for cellulosic biofuel, but the EPA cut that to 6.5 million gallons. It appears that the industry might have produced less than 1 million gallons last year, reported ClimateWire on Tuesday, citing an estimate by a government analyst.

(On the other hand Valero is moving ahead with plans to invest $50 million in the Mascoma plant in upstate New York, that move will include the purchase of just under a million barrels of cellulosic ethanol) .

That decline is now, however, the concern expressed by API. Among other issues, there are two problems that higher concentrations of ethanol in the mix may cause that are not necessarily that evident. The first is that those of us who use small engines for mowers, chain saws, trimmers etc may find these running unexpectedly hot if they use the new mix. And albeit the manufacturers warn against its use, most of us fill the can while we are refueling the car, and from the same pump.

The other concern relates to the seals in tanks and underground storage.

Just as there are seals in gaskets in cars that can be affected by E15, similar seals and gaskets can be found at the service station and the pump above the ground and the underground storage tank. The DOE recently released some test results of gas station dispensers and the results were pretty sobering. About 70 percent of the older equipment in existence failed these tests and about 30 percent of the new equipment failed these tests. That is a real liability concern because if you are a service station owner and have to determine whether to use E15 in an existing underground storage tank when the replacement costs for that storage tank could be $50,000 to $200,000. The testing that the DOE did was only above ground.

If that weren’t enough – since we won’t have much cellulosic ethanol, we’re going to have to rely on corn. And what is the story on the price of corn? March prices are $6.59 a bushel, and still rallying.

Output in the U.S., the world’s largest grain exporter, dropped 4.9 percent last year, leaving supply before the 2011 harvest at the lowest in 15 years, the Department of Agriculture said last week. The agency also cut its forecast for global inventories to 127 million metric tons, the lowest since 2007.

“Prices have not risen high enough to slow demand,” said Greg Grow, the director of agribusiness for Archer Financial Services Inc. in Chicago. “The attitude among consumers is that you have to buy the breaks to accumulate tightening inventories.”

I guess one of the interesting questions becomes as to whether we will see $5 a gallon gasoline in 2011 or 2012?

Of course we could talk of alternate investments in geothermal, the less popular renewable. But maybe I’ll hold off on that for another day.