US Energy Policy: Time for a Reality Check? Lucian Pugliaresi Energy Policy Research Foundation, Inc Open Round Columbia 2010 Columbia Petroleum Show Industrial Panel Bogota December 2, 2009 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org
EPRINC Fighting Ignorance About Oil and Gas Markets Since 1944* www.eprinc.org * It s taking longer than we thought. Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 2
What are the Energy Policies of the Obama Administration? 1 million plug-in-electric hybrid vehicles (PHEVs) on the road by 2015 5 million new green jobs by investing $150 billion over 10 years Reducing US oil consumption within 10 years by 2-3 mb/d Requiring 10 percent of the nation's electricity to come from renewable energy by 2012 and 25 percent by 2025. Establishing an economy-wide cap-and-trade program that cuts US greenhouse gas emissions (Waxman-Markey calls for cuts of 2 gigatons by 2030) Not a Complete List!!!!
A Few of the Administration s Implementation Strategies Higher taxes on upstream and downstream operations to provide more funding for renewables (US is over investing in oil and gas) Mandates -- biofuels and use of renewables in electricity generation Subsidies for Green Job Technologies Cap and Trade Expanding Nuclear and Upstream Petroleum Production?
Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 5
Tax Proposals in Treasury Green Book Repeal of IDC expenses Repeal G&G Expenses Raise Corporate Income Taxes for Oil and Gas Operations Only Repeal of Percentage Depletion Allowance Fee on Non Producing Leases And Lots More.
Energy Subsidies Not Related to Electricity Production Category Fuel Consumption (Quadrillion BTU) FY 2007 Subsidy and Subsidy per Million Suppot (million 2007 BTU dollars) Coal 1.93 78 0.04 Refined Coal 0.16 214 1.35 Natural Gas and Petroleum Liquids 55.78 1921 0.03 Ethanol/Biofuels 0.57 3249 5.72 Geothermal 0.04 1 0.02 Solar 0.07 360 2.82 Other Renewables 2.5 184 0.14 Hydrogen * 230 NM Total Fuel Specific 60.95 6237 0.1 Total Non-Fuel Specific NM 3597 NM Total End-Use and Non-Electricity NM 9834 NM Source: EIA Data Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 7
Recent Trends in Oil, Gas, and Coal Prices 30 25 20 $/million BTU 15 10 Henry Hub Natural Gas Futures Contract 1 (Dollars/Mil. BTUs) Central Appalachian Coal (12,500 btu/lb) 1.2 SO2 (Dollars/Mil. BTUs) Weekly Cushing, OK WTI Spot Price FOB (Dollars/Mil. BTUs) 5 0 Source: EIA data, EPRINC Calculations
U.S. Crude Oil Production, Consumption, and Imports 25 20 15 U.S. Net Imports of Crude Oil and Petroleum Products mbd 10 Imports U.S. Field Production of Crude Oil U.S. Product Supplied of Crude Oil and Petroleum Products, Minus NGLs and Liquid Refinery Gases 5 Production 0 Source: : EIA Data, EPRINC Calculation. NGLs are not included in any of these data sets. Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 9
The Peak Oil Problem: New Supplies Will Be More Expensive, but We Are Not Running Out of Oil 10
San Joaquin Valley Testing Hubbard-Method Predictions for Reserves and Production (Billions of Barrels) 1964 1982 2000 Cumulative Discoveries Percent Attributable to 1915 Cumulative production as of 7.7 11.8 16.1 49% 69% 76% 8.0-9.5 11.9-12.1 16.1-16.2 Year 2000 production projected in: (mb/d) 44-112 189 597(actual) Source: EPRINC, October 2006. Does the Hubbard Method Provide a Reliable Means for Predicting Future Oil Production, Richard Nehring, October 2006, Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 11
Permian Basin Testing Hubbard-Method Predictions for Reserves and Production (Billions of Barrels) 1964 1982 2000 Cumulative Discoveries Percent Attributable to 1950 Cumulative production as of 17.6 27.9 35.2 85% 86% 84% 19-27.5 28.5-30.5 35.8-37.5 Year 2000 production projected in: (mb/d) 162-479 326-479 910(actual) Source: EPRINC, October 2006. Does the Hubbard Method Provide a Reliable Means for Predicting Future Oil Production, Richard Nehring, October 2006, Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 12
25 Projected Petroleum Imports -- US History Projections 20 million barrels per day 15 10 Consumption Domestic Supply 60% Net Imports 54% 5 0 Source: EIA/AEO 2008 1960 1970 1980 1990 2000 2010 2020 2030 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 13
Stripper Well Production 20 18 Percent of Oil Production 16 14 12 10 8 65 67 69 71 73 75 77 79 81 83 85 Percent of Oil Wells Source: EIA Data, http://www.eia.doe.gov/pub/oil_gas/petrosystem/us-3o.html Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 14
U.S. Natural Gas Marketed Production 1973-2009 2.2 2 trillion cubic feet 1.8 1.6 1.4 1.2 1 Jan-1973 Jan-1974 Jan-1975 Jan-1976 Jan-1977 Jan-1978 Jan-1979 Jan-1980 Jan-1981 Jan-1982 Jan-1983 Jan-1984 Jan-1985 Jan-1986 Jan-1987 Jan-1988 Jan-1989 Jan-1990 Jan-1991 Jan-1992 Jan-1993 Jan-1994 Jan-1995 Jan-1996 Jan-1997 Jan-1998 Jan-1999 Jan-2000 Jan-2001 Jan-2002 Jan-2003 Jan-2004 Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 15
Lost Production Breakeven Points for Repeal of Percentage Depletion Where Increased Revenue to Treasury = Financial Loss to U.S. Economy from Higher Crude Oil Imports, 2010 2020 800 700 600 000 bd of Lost Production 500 400 300 200 Baseline Historical Natural Decline Rate (1994-2006), 3%/yr 4%/yr decline, +1% over base 13%/yr decline, +10% over base Revenue Neutral Breakeven Point for Percentage Depletion 100 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Source: EPRINC calculations. Marginal oil wells tend to decline at about 3 percent per year. The loss in the depletion allowance will likely increase this rate of decline to anywhere from 4 to 13 percent per year. Natural gas production, which has experienced very low prices as gas values, at least for the near term have decoupled from crude oil, is probably even more at risk. Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 16
Waxman-Markey Cap and Trade It May Not be the Most Costly Approach for Removing Carbon But its Close Or How to End Refining as We Know It
What it takes to offset 1 gigaton of carbon TODAY S TECHNOLOGY Coal-fired power plants Geologic sequestration Nuclear Efficiency Wind energy Solar photovoltaics Biofuels for transport CO 2 storage in forests Actions providing 1 Gt mitigation/year Build 1,000 zero-emission 500 MW coal-fired power plants Install 3,700 sequestration sites like Norway s Sleipner project (0.27 MtC/year) Build 500 new nuclear plants, each 1 GW in size Deploy 1 billion new cars at 40 miles per gallon (mpg) instead of 20 mpg Install capacity to supply 50 times the current global wind generation Install capacity to supply 1000 times the current global solar PV generation Convert a barren area 15 times the size of Iowa s farmland (30 million acres) to biomass production Convert a barren area 30 times the size of Iowa s farmland to new forest Source: DOE Climate Change Technology Program Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 18
Number of U.S. Refineries and Capacity 20 350 mbd 18 16 14 12 10 8 6 4 2 0 300 250 200 150 100 50 0 1970 1972 Refineries 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Capacity Refineries Source: EPRINC calculations, EIA data
18% Gasoline Imports to U S 1970-2009 16% 14% 12% 10% 8% 6% Gasoline Imports Share 4% 2% 0% Jan-1970 Jul-1971 Jan-1973 Jul-1974 Jan-1976 Jul-1977 Jan-1979 Jul-1980 Jan-1982 Jul-1983 Jan-1985 Jul-1986 Jan-1988 Jul-1989 Jan-1991 Jul-1992 Jan-1994 Jul-1995 Jan-1997 Jul-1998 Jan-2000 Jul-2001 Jan-2003 Jul-2004 Jan-2006 Jul-2007 Jan-2009 Source: EIA data, EPRINC calculations
US Refinery Capacity Utilization 1985-2009 18 100 17.5 95 17 90 mbd 16.5 16 15.5 15 85 80 75 % Utilization U.S. Percent Utilization of Refinery Operable Capacity 14.5 70 14 65 13.5 60 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 U. S. Operable Crude Oil Distillation Capacity (Thousand Barrels per Day) Source: EIA data, EPRINC Calculations
Compliance Costs: US Refining Industry 80 70 billion $ annually 60 50 40 30 20 Cost of Allowances to Cover Product Combustion Cost of Allowances to Cover Stationary Source Emissions Total Cost of Allowances, Stationary Source and Product Combustion net of 2 % allocation 10 0 2012 2015 2020 2025 2030
Effective Cost of Production: US Product Slate 10 9 $/bbl 8 7 5 mbd 10 mbd 15 mbd 6 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100 103 106 109 112 115 118 121 EPRINC COST EFFECTIVE COMPLEXITY INDEX Source: EPRINC Calculations from OGJ and proprietary refinery data sets of complexity, product slate valuations, and location. Product slate standardized to common EPRINC product/cost value index.
U.S. Refiners' Future Cost of Production (2015-2030) 35 30 Blend Wall Costs $/bbl 25 20 15 Stationary Emissions Costs @ $40/ton Stationary Emissions Costs @ $20/ton Section 199 Costs 10 Most Complex Generally Larger Least Complex Generally Smaller Product Combustion Costs @ $20/ton Effective Production Cost 5 0 5 mbd 10 mbd 15 mbd Source: EPRINC Calculations, EIA Data Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 24
Pass Through or Capacity Losses 2015-2030 Source: Forthcoming EPRINC report on Capacity Consequences of Waxman-Markey Cap and Trade Program. EPRINC calculations.
Conclusions Administration Still Running on Belief System i.e., Oil is Bad and Renewables Are Good, but Numbers are Disturbing. Trade and Implementation Risks Associated with Waxman Markey Not Well Understood, and a Long Fight is Ahead
Extra Slides for Questions and Answers
FFVs and E85 Usage 7 10.00% Million Vehicles 6 5 4 3 2 1 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% Light Duty E85 FFV's In Use % of FFV's Actually Operating on E85 0 0.00% 2003 2004 2005 2006 2007 Source: EIA Data, DOE Data, EPRINC Calculations Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 28
The Blend Wall in a low RBOB World 2.5 Estimated all-in cost for ethanol: corn + operating costs + capital costs 2 $/gallon 1.5 1 0.5 0 Price difference between ethanol and RBOB After serving its role as an oxygenate, ethanol must compete directly with gasoline 1 2 3 4 5 6 7 8 9 10 11 12 13 % of Gasoline Pool Ethanol loses significant value as it moves into E85 Blender's Credit: $0.45/gallon Falling values for ethanol will be mirrored by rising values for RINs RBOB (NYMEX Futures: March Delivery) Ethanol's Value Relative to Gasoline Ethanol (CBOT Futures: March Delivery) Corn Feedstock - $ per gallon of Ethanol All In-Cost of Ethanol Production 29
EISA 07 Renewable Fuels Standard 50 45 40 Biomass based Diesel Billion Gallons 35 30 25 20 15 10 5 0 Any Advanced Cellulosic Advanced Corn Ethanol / Other EPACT 05 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 10% Ethanol Penetration (The Blend Wall) Source: DOE, EIA Data and June 2009 STEO. Blend wall assumes projected 2009 gasoline consumption found in the June 2009 EIA STEO. Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 30
95 A Series of Unfortunate Events Leading to New Expectations Positive Expectations Expectations Shift Negative Expectations 160 90 Oil development in Iraq delayed Yukos -- Kremlin taking control of Russian oil development Russia takes over Sakhalin II, Chavez Nationalizes Projects 140 120 Global Production, million b/d 85 80 Continuing civil strife in Sudan, Nigeria 100 80 60 $/bbl 75 Outlook positive for expanded output from Nigeria, Mexico, Venez., Russia, North Slope 4.2 5.8 70 OPEC Excess Capacity remains limited Congress continues ban on ANWR and offshore development Nigeria rebels hurt output 1.9 1.3 0.95 1.3 2 1.7 0 2001 2002 2003 2004 2005 2006 2007 2008e 40 20 World Oil Production (EIA) OPEC Excess Capacity (EIA) Expected Production (EIA 2001 Predictions) Crude Oil Price