Oil and Gas Exploration and Pipelines

Transcription

1 Oil and Gas Exploration and Pipelines

2 Highlights Issues covered today will touch on a few concepts that have been presented in the course Externalities (difference between private and social cost) Shadow prices (prices for carbon) Internal Rates of Return

3 Concerns about Oil and Gas Exploration and Pipelines to Transport These Resources Oil and Natural gas exploration generally raises concerns about green house gas emissions. The transport of oil and natural gas, primarily through pipelines also raises concerns by environmentalists, which include damage to habitat during construction, pollution caused by spills and they facilitate green house gas emissions These concerns reflect external costs that create differences between the private and social costs

4 Private versus Social Costs

5 Generally, the difference between private and social costs can reflect green house gas emissions Difference can also reflect the effects of fracking, a process that exploits unconventional deposits of oil and gas, in Canada and the U.S., which can have effects on well water and water tables/acquifiers Ecological issues, damage to the habitats of wildlife, both on land and in water, can also be reflected in the differences between private and social costs

6 An Oil Spill from the Keystone Pipeline in South Dakota

7 Background Information Before we get back to economic and regulatory framework I will provide some background on these industries Will discuss the exploration and production of oil and natural gas as well as their collection and transport Focus on Conventional Oil and Gas Oil Sands Shale Oil and Gas Collection vs Transmission Pipelines

8 Lightness and Sweetness Oil is not a homogenous resource, it has a few characteristics that determine its value as a commodity Gravity, a higher number indicates a lighter crude (e.g., 45-50), flows easier, easier to extract high value added refined products from it (e.g., gasoline, jet fuel); a lower number indicates a heavier crude (e.g. 10). Sweet vs Sour, sweet crude has low concentrations of sulfur, which makes it easier to refine; sour crude has a lot of sulfur. Benchmark crudes price, e.g., Brent Sea, WTI, are for sweet light crude; heavy crudes trade at a discount (i.e., they are cheaper than light crude).

9 Natural gas can also be sour, i.e., have a lot of sulfur. Natural gas can also have a lot of liquids that are mixed with them when they are extracted. Natural Gas Liquids (NGLs) include propane, butane, pentane Condensate is also a liquid that it extracted with natural gas, it is used to blend with heavy oil to transport it for through pipelines. The liquids are separated from the natural gas and transported separately from the natural gas.

10 Conventional vs Unconventional Oil and Gas

11 Oil Sands: SAGD vs Mining

12 An Oil Sands Mine

13 Comparison of Oil: Heavy vs Light

14 How fracking extracts Natural Gas (Oil) from Shale

15 Environmental Risks from Fracking

16 Ecological Concerns Associated with Fracking Fracking also needs sand to inject along with chemicals to extract oil and natural gas from rock formations. This means that sand needs to be mined and used in fracking. In south western U.S., the mining for sand threatens the habitat of the dunes sagebrush lizard (pictured in the left panel).

17 From Oil and Gas Production to Distribution

18 Location of Oil and Natural Gas Pipelines

19 Map Denoting Some Noteworthy Oil and Natural Gas Pipelines

20 Oil and Natural Gas Exploration Firms tend to evaluate the benefits and costs of a project Benefits Revenue from Oil and Gas you produce Here costs are private costs primarily Costs of land or leasing land Exploration cost (costs of finding oil) Development cost (cost of developing an oil field into a producing asset) Royalities to government (percentage of production revenues, e.g., new fields pay between 5 and 40 % in Alberta) Transportation costs Social Costs (green house gas emissions) Carbon taxes (recently implemented in Canada, but not in many other countries)

21 Sometimes the government can impose regulations that increase the cost of developing an oil and gas asset For example, oil sands developments, like many the mining industry in many jurisdictions, in Canada need to return the land back to its natural state after they finishing mining; restrictions on tailings ponds Sometimes the government can outright ban development, e.g., President Obama in 2016 banned exploration for oil and natural gas in Arctic; President Trump overturned this ban in 2017 Canada also imposed a ban on oil and gas exploration in the Arctic in 2016

22 Rather than computing NPVs for an oil project, firms generally compute IRR Recall from lecture 2 that the IRR is computed as follows B 0 C 0 + B 1 C IRR + + B T C T 1 + IRR T = 0 You take the IRR from above and compare it an internal benchmark, if IRR > the internal benchmark then proceed with the project Internal benchmarks of 10 to 14 percent are probably reasonable, each company will have its own level

23 Uncertainty Complications, uncertainty about future costs and benefits Prices of oil collapsed after 2014 (were in the $100 dollar range at the start of 2014) and fell into high-$30 range and low-$40 range in In 2017 oil price fluctuated between $45 and $50 for most of the year Prices of natural gas during the summer of 2017 in western Canada were negative at times Prices for exploration equipment can vary over time Wage costs can vary over time as well, e.g., during the boom periods of Oil Sands you could easily make over $100K working in the Oil Sands projects and there were labour shortages in Alberta, now you would be lucky if you could find a job

24 Uncertainty Changes in demand Electrification of cars Can have changes in regulatory environment Bans on drilling in the Arctic Changes in carbon pricing Greenhouse gas emissions limits

25 Environmental Concerns with Pipelines A number of pipeline projects have attracted a great deal of attention in the media. Keystone XL (southward through the U.S., Nebraska has had a lot of protest against it). Transmountain (British Columbia and Alberta) Energy East (Eastern Canada)

26 Issues raised against pipelines Damage habitat of wild life as well as endanger animal and insect species (sage grouse[keystone XL], burying bettles [Keystone XL], Orca whales [Transmountain], Beluga whales and dolphins [Energy East]) Spills pose a threat to Ogallala Aquifer (Keystone XL, which passes through Nebraska, which sits above the Aquifier) Damage to drinking water sources (spills from pipelines) Increase Green House Gas emissions Damage land considered to be sacred by First Nations of North American (Keystone XL, Transmountain, Energy East)

27 Regulation of Pipelines in Canada In Canada pipelines are regulated by the National Energy Board (NEB). The mandate of the NEB: In the Public Interest The Board regulates pipelines, energy development and trade in the Canadian public interest. The public interest is inclusive of all Canadians and refers to a balance of economic, environmental and social considerations that changes as society s values and preferences evolve over time.

28 The NEB can be viewed as determining what the social costs are and how different they are from the private costs. Unlike the approach we ve applied in class, the NEB doesn t assign numbers (dollars to benefits and costs, at least publicly), but their decision to approve a project means that a project has positive net benefits from the perspective of the evaluation criteria they use

29 Here are the Benefits of the Transmountain Pipeline Opposite is a summary of the benefits from the Transmountain pipeline NOTE: some of the benefits that are reported are secondary impacts (redistribution of income) so they should not be included in a formal cost benefit calculation

30 Transmountain benefits 15,000 construction jobs and the equivalent of 37,000 direct, indirect and induced jobs per year of operations Direct construction workforce spending in communities along the pipeline route is estimated to be $480 million

31 Trans Mountain Benefits First Nations Benefits are a key part of the consultation process For First Nations Communities : Trans Mountain supports employment, training and business opportunities for First Nations communities. As part of the engagement process, we work collaboratively with First Nations communities that might have an interest in the Project, or have First Nations interests potentially affected by the Project, to support access to economic development opportunities job and training opportunities, and funds for a variety of community initiatives

32 Trans Mountain Costs Generally viewed as the damage to environment, and potential for increased green house gas emissions

33 TransMountain pipeline was determined as a worthwhile project to pursue by the NEB; although there was a court challenge to it mounted by the provincial government of British Columbia and some other groups opposed to it during the Fall of 2017

34 Shift in regulatory regime In 2017, the NEB changed its criteria for the Energy East pipeline and other future pipelines In addition, the NEB will consider upstream and downstream greenhouse gas emissions (GHGs) in determining whether these projects are in the public interest. The NEB also wants to examine the potential market impacts of GHGs reduction targets embedded in laws and policies on the economic viability of the projects. TransCanada response After careful review of changed circumstances, we will be informing the National Energy Board that we will no longer be proceeding with our Energy East and Eastern Mainline applications. TransCanada will also notify Quebec s Ministère du Developpement durable, de l Environnement, et Lutte contre les changements climatiques that it is withdrawing the Energy East project from the environmental review process.

35 Conclusion This lecture highlighted issues in the exploration of Oil and Gas resources and their transportation to market