NOVEMBER 2017: Issue 111 forum

A QUARTERLY JOURNAL FOR DEBATING ENERGY ISSUES AND POLICIES

This issue of the Forum focuses on the The author argues that the administration CONTENTS potential outcomes and impact of US has a mixed record on all three. First, the energy policy over the next four years, both production of energy resources is a What’s next for US energy policy? for the US domestic economy and for process over which the federal Dissecting the idea of US energy international energy markets. The advent of government has limited control, with dominance the Trump Administration has marked a market forces proving extremely Sarah Ladislaw 5 dramatic reversal of previous US energy important factors in determining that policy, including on regulation, clean outcome. Second, efforts to roll back US energy diplomacy in an age of energy abundance energy, and US commitments under the regulations using administrative Meghan L O’Sullivan 8 Paris Agreement. Despite this, the procedures will be a long, litigious, and emerging consensus from the issue is that uncertain operation, with pushback from Trump’s energy policy: a sharp shift markets, rather than US domestic policy, the private sector which is arguing that but markets trump Jason Bordoff 11 will continue to play the dominant role in stable regulation, rather than too much or shaping outcomes. More difficult to predict, too little, is needed to boost investment. ‘Energy dominance’: the right goal however, is the potential impact that trade And third, the emphasis on energy for US policy? protectionism and an inward-looking exports through bilateral transactions may Daniel Raimi 15 foreign policy may have on the functioning well be undermined by the US shale gas: view of the domestic of international energy markets. administration’s approach to trade. market Michelle Michot Foss 18 The issue opens with four articles analysing Meghan O’ Sullivan examines the in detail the Trump Administration’s rallying proposition that US energy abundance The impact of US LNG exports on around ‘energy dominance’ as a key policy could render America’s need for energy the international LNG market objective. Sarah Ladislaw argues that the diplomacy obsolete, paving the way for Howard Rogers 22 use of slogans in US energy policy is not US disengagement in the world. US shale productivity gains: can they uncommon, particularly to galvanize Although it no longer needs to import be sustained? support for policies, regulations, and energy at a huge scale, it continues to Trisha Curtis 26 investments that might otherwise be have many of the same energy US crude exports: gaining ground difficult to achieve on a purely commercial diplomacy priorities as in the past. What Dominic Haywood 30 basis. The pursuit of energy dominance is different is that in a new environment The outlook for biofuels in the USA involves three elements: of plentiful energy, the USA will find it Scott H. Irwin 32 producing more energy to lower the easier to achieve these objectives, input cost to the economy, namely: Can the US coal industry come back? David Schlissel 35 removing regulations on the sector to ensuring that global energy markets increase production opportunities, and (particularly oil) are well-supplied; The USA and climate change: the importance of electricity pursuing energy trading opportunities encouraging allies to diversify their own David Robinson 40 with other countries. sources of energy; and,

OXFORD ENERGY FORUM

investigates the impact of (by 2021 LNG supply will be 54 per cent higher than 2015), raising the prospects anof a ‘glut’ from 2019 to 2022. From this is the ‘best LNG sector point of view, of times’, in that there is a cornucopia of gas discoveries available for feedgas into LNG projects; it is also the ‘worst of times’ shift has taken place toward earnings and returns. The author also highlights concerns over the quality of production data, and discusses the upstream– midstream interface following the advent of ‘master limited partnerships’. In effect, the US ‘shale’ gas component is now the industry’s of largely a by-product ability to sustain liquids (including natural gas liquids) investment and production. As long as liquids prices are sufficiently attractive, domestic gas supply and commercialization, including exports, can continue. Howard Rogers US LNG exports on the international of US exportmarket. The ‘First Wave’ projects, comprising 91 bcma of gas (not far short of Qatar’s 104 bcma in 2016), will flow to global gas markets by 2020 – even at destination market prices as low as Henry Hub plus $1.5/MMBtu. This represents an increase of 27 per cent over 2015’s global LNG supply volumes has continued, with production of liquids with production of has continued, and at high levels and gas remaining research showsincreasing. The author’s upstreamthat the most significant come from improvements have impacts buying and sellingin acreage portfolios – company’saimed at increasing a ‘sweet spot’holdings of the best, prime better the drillingdrilling locations. The impact fromlocation, the greater the Despite markedtechnology deployment. performanceimprovements in cost (achieved through better operational logistics) a key observation has been the inability of producers to hold capex The US spending within cash flow. industry has entered a phase in which debate swirls around which targets forward. Thus going investors may prefer, been on production the emphasis has far, a pronounced growth, but this past year,

all assesses asks if the USA is on track to asks if the USA is on Michelle Michot Foss adjusted, and that adjustment process reducing greenhouse gas emissions at low cost. The next two articles in the issue deal with shale gas. the prospects for US domestic shale gas. As oil prices slipped between mid-2014 and early 2016, a persistent question was whether US domestic oil and gas producers – increasingly wedded to tight rock plays – would be able to adjust and forge ahead. In fact, most had already they produce at home. The author argues that ‘energy dominance’ is undesirable, as the USA and other energy importers have themselves eschewed the use of oil as a geopolitical weapon, and dominance will not necessarily come at the expense of the USA’s geopolitical foes. The author concludes that policymakers should recognize the value of deeper integration into global energy markets, energy resilience, energy efficiency (to curb exposure to volatile energy prices), and positive territory in the coming years, these new supplies on the global market will not upend the importance of traditional energy powers like Saudi Arabia and Russia. Scale is not the only reason why ‘energy dominance’ is because the logic of the market, unlikely, rather than the logic of geopolitics, determines energy trade flows. A disruption in one corner of the world will quickly translate into a price spike for consumers, regardless of the amount the Trump Administration’s ‘America First’ Administration’s the Trump foreign policy. Daniel Raimi and ifbecome ‘energy dominant’, Despite the‘dominance’ is desirable. US shale, the authoroptimism induced by to both of theseargues that the answer US economy, questions is ‘no’. The in energydespite improvements is still the second-largest efficiency, energy consumer in the world. And while net energy exports may move into significance to both the global energy to both the global significance as will to the global economy, sector and consequences ofthe broader geopolitical because the not argues that despite the OXFORD ENERGY FORUM 2 consumer of oil to penalize countries,consumer change policies.or to compel them to using its power as the largest globalusing its power domestic policy changes – on sanctions, trade, and taxes – will be of more day in 2025. The author concludes that energy policy represents a while Trump’s ‘sharp shift’, market conditions and other economy standards from 2022 to 2025; cancelling these would boost US oil demand by around 200,000 barrels per are without impact. For instance on theare without impact. For has signalled that he demand side, Trump wants to ease the next round of fuel much energy policy is actually made at the state and not the federal level. This is policy changes not to say that all Trump’s improvements. It also remains to be seen how much of the sharp deregulatory push Furthermore, will survive judicial review. supply was set to rise sharply in any event – with higher prices and dramatic technology and productivity achieve. For instance, reversing rulesachieve. For regulating oil and gas production may help output on the margin, but US oil greenhouse gas emissions unless market conditions change, and even then there are limits on what the administration can rhetoric, many of the actions Trump has rhetoric, many of the actions Trump announced to date will have relatively modest impacts on energy markets and policymakers should prioritize the smooth functioning of global energy markets. Jason Bordoff rather than looking for ways in which they can use US energy prowess as a cudgel to address a particular problem, outcomes will continue to be contingent upon the country’s capacity to secure the cooperation of other nations. As a result, conducive to US interests. Therefore, USconducive to US interests. ability to affect particular foreign policy instruments of power, but because instruments of power, in ways thatmarkets have changed or are morealleviate past concerns, enjoyed by the USA as a result of the newenjoyed by the USA as energy abundance are presented newnew environment has At the same time, the author shows thatAt the same time, the beingmany of the political benefits WHAT’S NEXT FOR US ENERGY POLICY? FOR US ENERGY NEXT WHAT’S

INTRODUCTION TO THIS ISSUE INTRODUCTION TO THIS ISSUE 3 David OXFORD ENERGY FORUM analyses the Trump campaign’s analyses the Trump by high-priced biodiesel. Disagreements over whether the point of obligation for the RFS should be moved upstream from refiners to blenders of biofuel. The aggressive targets for cellulosicThe aggressive targets productionbiofuels relative to low capacity. Disputes between petroleum refiners and biofuel producers over the E10 blend wall (in other words, the ethanol content of gasoline blends is limited to a maximum of 10 per cent by volume) and the explosion in 2013 in the price of Renewable Identification Numbers tradeable credits) driven primarily (EPA industry as coal-fired plants generated about 5 per cent more power in the first half of this year than in the first six months recent data from the of 2016. However, US Department of Energy show that coal generation through year-to-date August 2017 was a mere 0.4 per cent The author argues that biofuels consumption in the USA is primarily driven by what happens to the RFS. A political stalemate over the RFS has developed that favours a ‘steady state’ outlook for the consumption of biofuels over the next five years. While this limits downside risk to US biofuel producers, it means that they will have to look to international markets for significant growth opportunities. The last two articles focus on prospects for the US electricity sector. Schlissel boasts, and subsequently the Trump Administration’s efforts, to ‘bring back’ US coal while creating more mining jobs. An initial wave of optimism did occur in the biofuel, biomass-based diesel, totalbiofuel, biomass-based biofuel (which includesadvanced and renewablebiomass-based diesel), The RFSfuel (‘conventional ethanol’). extremelymandates have been in the petroleumcontroversial, particularly and subject to almost refining sector, The authorcontinuous legal challenge. underpinning theexplains three issues debate. , focuses on Scott Irwin discusses how US deficit in global balances for shale production growth to fill. Sufficient infrastructure must exist to allow shale production growth to move from the wellhead to domestic trading hubs and export terminals. International markets need to become comfortable with the quality of US crude oil. US production growth must be sufficient to allow for both an increase in refinery demand in 2018 and incremental export demand. There will need to be a sufficient supply requirements over 2008–22 for cellulosic markets – such as Latin America – will be needed to absorb the export growth that is expected to materialize. The next article, by the outlook for biofuels. The author discusses how high real crude oil prices made biofuels more competitive in the marketplace, powering legislation on the Standard (RFS) throughRenewable Fuel the US Congress. The 2007 RFS statute required the US Environmental Protection to establish volume Agency (EPA) region will be the While the Asia-Pacific key destination market for US crude, new average 1.7 mb/d in 2018, with much of the y/y export growth occurring in the first half of 2018 – primarily due to a low base – but also continuing at a robust level volumes is, Achieving these thereafter. on several factors. dependent however, Dominic Haywood to beatcrude exports have continued surging to a recordmarket expectations, per day (mb/d)high of 1.8 million barrels the months earlier, in October 2017. A few the abilitymarket had fervently questioned than 1.2 mb/d,of the USA to export more wouldsuggesting capacity constraints cap departures at this level and result in large inventory builds on the US Gulf Coast. It is expected that exports will productivity gains as operator profitabilityproductivity – geologically But scrutiny. faces renewed – there isand technologically speaking certainly room to grow.

Trisha Curtis Trisha improve well productivity, in the short run, improve well productivity, economic constraints could imperil massive data sets to draw upon. The author concludes that while in, the long run, the shale industry will continue to working through their geology, enabling working through their geology, millions of acres across several shale plays to be de-risked, and generating simple completion design change – but as operators this is not the only factor, have also gained years of experience true. The author describes how one of the largest factors contributing to increased well productivity has been a relatively been both an art and a science. Over the past three years, in a sub-$60 oil price environment, this has never been more in substantially increased oil output per well. Drilling, completing, and producing shale or tight oil and gas wells has always ‘yes’. Every year from 2012 to 2017 has seen an uplift in both initial production as well as outer month production, resulting prospects for US tight oil. asks whether US shale productivity gains are sustainable – and the short answer is in the US Gulf at a cheaper cost than conventional projects. The next two articles move to consider the supply chain (upstream shale gas play, supply chain (upstream shale gas play, pipeline transportation, and liquefaction) which would deliver LNG on board a ship business models are emerging in which international LNG buyers/portfolio players are invited to invest in an integrated are willing, and can afford, to pay – for developing countries, this price has been estimated at around $6/MMBtu. New fundamental challenge for the ‘Nextfundamental challenge whether they can of US projects is Wave’ supply the LNG at a price that consumers respectively. Given that Qatar alone respectively. LNGcannot satisfy the potential therequirement in the 2020s, ‘high’ Asian LNG demand scenarios for‘high’ Asian LNG demand need to be taken2018–25, new FIDs will latest,by 2020 and 2018 at the of their future demand, and in the case ofof their future demand, the price they cannew LNG importers, of Under ‘low’ andafford to pay for LNG. in that buyers – particularly in Asia – are – particularly in Asia in that buyers uncertain with oil indexation, disenchanted NOVEMBER 2017: ISSUENOVEMBER 111 is a Senior Research is Chairman of the is Director of Resource emissions (80 per cent of GHG emissions (80 per cent 2 and potential influence on the lending policies of international institutions such Bank. as the World diminish the significance of USdiminish the Within the USA, in the PA. participation end of 2016, thebetween 2005 and the AdministrationUS Energy Information energy-related(EIA) estimates that annual CO per cent; theemissions) fell by 13.7 that theRhodium Group estimates responsible forelectricity sector was The authorabout 70 per cent of this. of coal withdescribes the substitution and the favourable gas-fired power, economics of solar and wind power generation, as key enablers of this reduction. One area where Trump’s policies could have a negative impact is on efforts to decarbonize the developing world – efforts which are critical to objectives – through achieving the PA reneging on existing and future GCF commitments, export credit guarantees, The views expressed in this issue are solely those of the authors and do not necessarily represent the views of the Oxford Institute for Energy Studies, its members, or any other organization or company. David Robinson at the Oxford Institute for Fellow Energy Studies Howard Rogers Natural Gas Research Programme at the and Senior Research Fellow Oxford Institute for Energy Studies David Schlissel Planning Analysis at the Institute for Energy Economics and Financial Cleveland, Ohio Analysis (IEEFA), We AreWe is the Jeane considers the considers is Director of the is Laurence J. Norton is Laurence J. is Senior Research ’ platform which represents cities, Meghan L. O’Sullivan Kirkpatrick Professor of the Practice of International Affairs and the Director of the Geopolitics of Energy Project at the School, Harvard University Kennedy Daniel Raimi Associate at Resources for the Future, School of Public Lecturer at the Ford and University of Michigan, Policy, Affiliate at the University of Faculty Michigan Energy Institute Chair of Agricultural Marketing at the Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign Sarah Ladislaw Energy and National Security Program at the Center for Strategic and DC International Studies, Washington, Scott H. Irwin Climate Action Plan and Clean Power Climate Action Plan and Clean Power Plan, from coalitions such as the ‘ Still In states, corporations, faith-based groups, universities, and other groups committed The author also to the goals of the PA. argues that the growing economic, financial, and political pressures favouring decarbonization in the USA and abroad PA is to reduce net GHG emissions by is to reduce net GHG PA levels by 2025;26–28 per cent of 2005 also submittedthe Obama Administration target of 80 peran emissions reduction levels in 2050.cent or more below 2005 to contribute $3The USA also pledged (GCF) to Fund billion to the Green Climate in climateassist developing countries change adaptation and mitigation. The author describes the strong negative political and public reaction to Trump’s policies such as the reversal of PA David Robinson the of US withdrawal from significance The US Nationally Agreement (PA). Paris (NDC) under theDetermined Contribution is Chief Energy is Crude Oil Analyst, is a former special is President and co- OXFORD ENERGY FORUM Energy Aspects Economist/Program Manager at the Center for Energy Economics, Bureau University of of Economic Geology, at Austin Texas Dominic Haywood Trisha Curtis Trisha and a Research founder of PetroNerds Associate at the Oxford Institute for Energy Studies Michelle Michot Foss now Professor of Professional Practice in International and Public Affairs and founding director of the Center on at Columbia Global Energy Policy University CONTRIBUTORS TO THIS ISSUE Jason Bordoff assistant to President Obama, and is 4 to undermine the financial viability of US coal-fired plants in coming years. together with advances in renewables technologies, that have hurt the coal industry in the past decade will continue explicit federal policies to reduce greenhouse gas emissions, the same inexorable market and economic forces, ageing of the nation’s coal fleet. The author analyses each of these factors in detail, concluding that even without energy market prices, increasing marketenergy market prices, penetration of renewables, very-low-to-flat and the growth in demand for electricity, on coal’. However, the reality is that coal on coal’. However, uneconomichas become increasingly natural gas anddue to sustained low attacked the Obama Administration, andattacked the Obama Agencythe Environmental Protection for waging a ‘war for eight years, (EPA), that this does not offer much cause forthat this does not offer in a substantialoptimism that coal is The coal industry long-term recovery. higher than it had been during the first it had been during the higher than argues of 2016. The author eight months WHAT’S NEXT FOR US ENERGY POLICY? FOR US ENERGY NEXT WHAT’S

INTRODUCTION TO THIS ISSUE NOVEMBER 2017: ISSUE 111

Dissecting the idea of US energy dominance Sarah Ladislaw

For better or worse, US energy policy technologies to drive employment and discussions often include slogans. ‘THE TRUMP ADMINISTRATION HAS economic growth. Much more than a rhetorical flourish, RALLIED AROUND A SLOGAN PRESIDENT these slogans are meant to galvanize TRUMP USED ON THE CAMPAIGN TRAIL – Increased US production and ability to export support for energy policies, regulations, ENERGY DOMINANCE.’ and investments that might otherwise So what’s new about energy dominance? be difficult to achieve or hard to justify At its core, energy dominance reflects on a purely commercial basis. For them to keep more of their hard-earned the administration’s optimism about the much of the last 40 years, the de facto dollars; and workers will have access to dramatic changes that have taken slogan was energy independence, more jobs and opportunities’. place in the US energy systems. Just an idea born out of President Nixon’s as energy independence was born at a time when the nation was newly 1973 Project Independence speech The three pillars of the energy dominance recognizing the vulnerabilities of import which set a national goal to ‘meet vision America’s energy needs from America’s dependence, energy dominance has own energy resources’ by 1980 in the The first part of this vision is essentially emerged during a period in which the wake of heightened sensitivity around the same underlying goal of energy USA is poised to export more energy oil import security due to the Arab oil independence, to which the typical than it consumes, for the first time in embargo. While energy independence rejoinder is another slogan – energy decades. The figure overleaf shows a has been dominant, other slogans interdependence – the idea that range of forecasts produced by the have been used as well. The World War countries derive more economic Energy Information Administration in II-era Manhattan Project, a research benefit through efficiency and security 2017. In all but three scenarios, the endeavour that made the USA into an through flexibility and mutual reliance. USA is projected to export more energy atomic power, has often been used Energy Secretary Rick Perry and than it consumes. as a rallying cry for any number of Interior Secretary Ryan Zinke have Over the last decade, the US policy objectives that require dedicated echoed this theme of leverage over resurgence in oil and natural gas resources and sustained effort in foreign adversaries several times since production has been nothing short of the area of US energy innovation. taking office, most often citing the remarkable, thanks to the production of More recently presidential candidate development of US energy resources tight oil and shale gas resources Secretary Clinton proposed to make as a way to avoid getting involved in onshore in the USA. In the World the USA the world’s clean energy foreign wars or to help European allies Energy Outlook 2017, the International superpower in an attempt to drive thwart the influence of overreliance on Energy Agency states that the growth more policy measures and investments Russian energy supplies. in US oil production over the last decade to advance low-carbon energy source The second and third pillars of the is the largest ramp-up in oil production development and use. energy dominance vision – cheap in history. In the last 10 years, crude oil Not surprisingly the Trump Administration energy prices for American households production grew by 75 per cent and has rallied around a slogan President and using energy as a source of natural gas production by 45 per cent, Trump used on the campaign trail job creation – are much more about making the USA the largest oil and gas – energy dominance. After being utilizing domestic energy a source producer in the world. As a result, oil elected, the president laid out his of economic growth. Again, this is a exports from the USA are growing vision for energy dominance in a June familiar theme for US energy policy (despite the fact that the USA still 2017 speech at the US Department of as well. Energy naturally plays an imports approximately 8 million barrels Energy in which he said that energy important role in the US economy; a day as well). During the first half of dominance means the USA will ‘no policymakers at the state and federal 2017, the USA hit a new record by longer be vulnerable to foreign regimes level have long sought to decrease exporting more than 6 million barrels that use energy as an economic the price of energy as an input to per day of crude oil and products to weapon; American families will have economic activity, and also to produce nearly 27 countries around the world. access to cheaper energy, allowing energy resources or create energy The EIA also reported that the USA

OXFORD ENERGY FORUM 5 OEF 111 Figures

three columns

The USA becomes a net energy exporter in most cases as petroleum liquid imports fall and natural gas exports rise WHAT’S NEXT FOR US ENERGY POLICY? Source: Annual Energy Outlook 2017, US Energy Information Administration.

2016 40 historical projections 30

20 net imports 10

0 1980 1990 2000 2010 2020 2030 2040 -10 net exports -20

Net energy Net energy trade (quadrillion Btu) -30 Reference case Low oil price High oil price Low economic growth High economic growth Low oil and gas research and technology High oil and gas research and technology The USA becomes a net energy exporter in most cases as petroleum liquid imports fall and natural gas exports rise Source: Annual Energy Outlook 2017, US Energy Information Administration.

US Department of the Interior grants Making changes to US energy ‘ENERGY DOMINANCE IS ABOUT access on federal lands, establishes regulation through administrative REAPING ALL THE BENEFITS OF THIS safety standards, and sets royalty rates procedures is a long, litigious, SUPPLY SURGE, BOTH ECONOMIC AND on production. The Environmental and uncertain operation, given the GEOPOLITICAL.’ Protection Agency regulates pendulum politics of the US political environmental performance related to system. Efforts to roll back regulation and attract large-scale new investment became a net exporter of gas in 2017, air, land, and water. The heads of both are limited by this dynamic and the and going forward exports of gas are organizations have repeatedly asserted private sector is pushing back. For expected to increase substantially as that regulation has killed investment example, several utility groups have new liquefied natural gas export in areas of production they would like argued that the administration needs facilities come online. Energy to see grow – coal production and dominance is about reaping all the use in the electric power sector, and to put in place greenhouse gas benefits of this supply surge, both drilling and mining for oil, coal, and emissions regulation on the electric economic and geopolitical. gas resources on federal lands. Ample power sector and not simply roll back evidence suggests that the decline those regulations. Similarly, influential The US pursuit of energy dominance in coal production and consumption voices in the oil and gas sector have The relatively simple calculus of in the USA happened because of US made similar points about methane pursuing energy dominance is to: shale gas production and other market regulation, arguing that stable regulation, rather than too much or too 1 produce more energy to lower the factors (regulation did play a role but little, is needed to boost investment. cost as a basic input to the economy, perhaps not the most significant one) 2 remove regulations on the energy and that the decline in US investment The need to trade in energy sector to increase production in oil and gas development on federal resources is emphasized by the opportunities, lands occurred while unprecedented administration in order to improve amounts of investment and new 3 pursue energy trading opportunities US trade balances, address energy production were taking place on with other countries. poverty, and thwart foreign adversaries private lands within the USA. As oil, who utilize energy as a tool of influence. So far, the administration has a mixed gas, and coal prices begin to recover, The most visible actions taken in this track record on all three counts. the administration may be able to regard are the bilateral memoranda of The production of energy resources encourage additional production, but understanding signed by government is a process over which the federal market forces are extremely important officials, or announced as part of a government has limited control. The factors in determining that outcome. high-level meeting between President

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Trump and his foreign counterparts. seems like a departure for the USA, it is The administration has referenced ‘THE USA SEEMS UTTERLY TONE DEAF TO something that many in the US energy energy trade in communiqués coming MANY OF ITS TRADITIONAL OECD ALLIES industry are welcoming, at least thus out of meetings with Japanese, – NOT MANY COUNTRIES ENJOY THE IDEA far. As China continues to advance its Chinese, and Indian counterparts. Both OF BEING DOMINATED.’ trade promotion around the world of the president’s major foreign trips through the Belt and Road Initiative and have been punctuated by announced using the immense power of its ‘all of absurd. Take for example the idea that energy deals in the Middle East and government’ approach to provide US liquefied natural gas exports will most recently with China. Many of the package deals, US companies have revolutionize European gas markets official statements merely point to the been increasingly concerned over their and deal a decisive geopolitical victory potential for future trade, particularly ability to compete in these markets. against Russia. As one columnist in the area of natural gas exports, A greater role for government in put it ‘selling into saturated markets and many other more concrete deals pushing exports and making deals is a at discounted prices’ does not yield are simply a repackaging of already welcome change for: a position of competitiveness or concluded business transactions. It is dominance. Moreover, the link between coal producers looking for a foothold not yet clear that these announcements energy power and foreign policy power in competitive Asian markets, are anything more than symbolic has always been, at best, tenuous. deliverables for high-level meetings nuclear reactor companies and As my co-authors and I describe in (a customary diplomatic occurrence). service providers struggling to compete our 2014 Center for Strategic and However, it is clear that other countries against China, Russia, and Korea, International Studies report New understand these types of bilateral natural gas companies hoping to be Energy New Geopolitics, energy transactions as being valued by the competitive against coal and can be used as a tool of stability or current administration. The ironic part renewables or to find opportunities in leverage, but far too often its ability to of this emphasis on energy exports is smaller markets like the Caribbean serve as a decisive point of leverage that it may well be undermined by the and Central America, in the area of geopolitical conflict is administration’s approach to trade. vastly overestimated. For example, oil industry service providers and Far more damage could be done to the shale gas and tight oil revolution petrochemical producers. US energy export relationships and has undoubtedly impacted global oil Given the contours of America’s new competitiveness if the administration and gas market dynamics over the energy dominance slogan, here is how chooses to pull out of, or backtrack on, last several years in profound ways, to make the most of it. major trade arrangements like NAFTA but these changing market dynamics or the Korean FTA. Damage could also have not fundamentally rewritten the be caused by pursuing protectionist US relationship with countries in the ‘FREE TRADE IN ENERGY GOODS AND policies such as tariff hikes on solar PV Middle East; the USA, as an ongoing SERVICES IS MUCH MORE IN THE US panels (as a result of the Suniva case oil exporter, is still susceptible to market recently decided by the International LONG-TERM INTEREST THAN A PURELY disruptions elsewhere in the world. Trade Commission) or additional tariffs MERCANTILIST APPROACH TO ENERGY on imported steel on the grounds How have countries around the world DEALS.’ of national security concerns (as received this notion of energy dominance? is currently being contemplated by The USA seems utterly tone deaf to the Department of Commerce). The many of its traditional OECD allies – not Be strategic, not just tactical. administration must seek a careful many countries enjoy the idea of being The USA should continue to support balance between export promotion and dominated – and the concept is longstanding institutions and defence of US industry, and sparking a antithetical to the system of free and arrangements that have served it well potentially damaging trade war. open energy markets that the USA has over the last several decades. Free promoted for decades. For the world’s trade in energy goods and services is major energy producers, however, it is much more in the US long-term Energy dominance in context an admission of what they have interest than a purely mercantilist One must take US energy sloganeering suspected all along – that the USA, approach to energy deals. Recognize with a pinch of salt. Of course, energy with its newfound oil and gas wealth, is that the USA has a fair number of dominance, like energy independence, seeking to gain market share. While this energy vulnerabilities – related to oil when taken to the extreme, is a bit blatant nationalist commercialism and gas supply disruptions, physical

OXFORD ENERGY FORUM 7 WHAT’S NEXT FOR US ENERGY POLICY?

infrastructure protection, and cyber job creation, and international undoubtedly has an energy threats. The USA can only be strong if competitiveness. The US revolution in advantage at its finger tips that can we continue to invest in, and protect oil and gas may get a lot of attention, and should be harnessed as much against, those disruptions. The but the growth in jobs and America’s as possible, but it would be a critical government should think about real competitive advantage exists in mistake to overestimate how much resilience to physical disruptions like renewables and other advanced that advantage can be wielded over the hurricanes experienced earlier this technologies as well. The administration other countries, or to believe that year. It should contemplate the value would do well to avoid the promotion bilateral trade deals in energy are of not only its Strategic Petroleum of only a certain set of fuels and more important than the fundamental Reserve but of the global system of technologies over others. Developing underpinnings of existing trade policy strategic stocks. Finally, it should economies in particular are interested and decades of energy diplomacy in devise a strategy for an energy sector in not only fossil-based energy which the USA negotiated with other that is becoming more and more resources but in distributed solar, countries using energy as a political dependent on digital controls and wind, storage, microgrids, and a suite tool rather than as a weapon. sensors in the age of cyber warfare. of other technologies and services The USA will get far more out of its A truly ‘all of the above’ approach that US companies have to offer. amazing energy resources and is warranted if the USA wants to use Understand the importance of capabilities through taking these energy to drive economic growth, energy diplomacy. The USA measures.

US energy diplomacy in an age of energy abundance Meghan L. O’Sullivan

For decades, fears of energy scarcity to import foreign energy at a huge 1 Ensuring that global energy drove American energy diplomacy. scale, it continues to have many of markets – the global oil market The dependence of the global the same energy diplomacy priorities in particular – are well supplied economy on oil, and America’s need that it has had in the past. What is The pursuit of this objective has to secure ever-growing quantities different is that in a new environment shaped complex relationships of this commodity, underpinned of plentiful energy, the USA will between the USA and many complex networks of alliances and have an easier time reaching these countries, with Saudi Arabia being intensive diplomatic endeavours. An objectives. Nevertheless, the USA is the most prominent example. While atmosphere of ever-increasing global not necessarily moving into a period the relationship between Washington competition for resources made these of easy energy diplomacy. It might and Riyadh has had many labours all the more urgent and high- squander this advantageous moment dimensions, America has often stakes. Today, in an age of energy by politicizing its own energy prowess looked to the kingdom to take action abundance, many anticipate that the instead of taking comfort in the fact to stabilize global energy markets. new US energy prowess will render that transformed energy markets are Whether this involved increasing such efforts obsolete and pave the way themselves delivering great benefits to Saudi production in advance of for US disengagement in the world. America and her allies. military action in Iraq or Libya, or Yet a sober look at reality suggests continuing to invest in productive that this should be far from the case. capacity in the face of burgeoning Although the USA no longer needs Objectives are constant, and easier to demand from emerging economies realize in the 2000s, Washington often ‘IN AN AGE OF ENERGY ABUNDANCE, A look at three objectives the USA sought Riyadh’s help in calming MANY ANTICIPATE THAT THE NEW US has traditionally pursued through its global oil markets and minimizing the ENERGY PROWESS WILL … PAVE THE energy diplomacy reveals how the new impact of increased energy WAY FOR US DISENGAGEMENT IN THE energy abundance does not annul their competition on the global economy. relevance, but simply enhances US Oil, for better or worse, was always a WORLD.’ efforts to realize them. topic of earnest exchange between

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senior policymakers from both plans to build extensive pipelines countries. connecting the Soviet Union with ‘THE NET EFFECT IS THAT LEVERAGE HAS Today, the USA remains connected to Europe, fearing that such links would SHIFTED FROM THE PRODUCER TO THE global markets, even as it has give the Soviets undue political CONSUMER, CHANGING THE BALANCE OF reached the status of the world’s influence. In the decades that POWER IN KEY RELATIONSHIPS.’ largest producer of oil and gas followed, following the break-up of combined. It continues to have a the Soviet Union, American officials also increasing efficiency. The net keen interest in seeing that global sought to convince their European effect is that leverage has shifted energy markets are well supplied and counterparts that the reliance of the from the producer to the consumer, that disruptions to the markets are continent on energy imports from changing the balance of power in key minimized. Yet, while the objective Russia created dangerous political relationships. In the case of Europe, remains the same, America has other and security vulnerabilities. Such the energy security of the continent is avenues to advance this goal, efforts went beyond diplomatic much improved, not primarily including ensuring continued entreaties and included great because of new mega-pipelines or production of its own resources. exertions to midwife new pipelines to even the chance of importing Although the Saudis and other bring natural gas supplies from the American LNG, but because of traditional producers remain Caspian region to Europe. Some – changes in the structure of natural such as the ill-fated Nabucco important players in the global oil gas markets. market, their spare capacity is less pipeline – failed, while others – such critical in managing global oil as the more modest TANAP and TAP 3 Using its power as the largest markets than it was in the past. While pipelines – successfully provided global consumer of oil to not nearly a perfect substitute, the Europe with some element of penalize countries, or to compel productive capacity of America’s own diversification of supplies. them to change policies tight oil can help meet new demands Today, the USA still has keen Generally, this somewhat different for oil. In addition, given the interests in seeing that the energy objective of US energy diplomacy widespread availability of supplies of its allies in Europe and has involved the use of sanctions, unconventional resources worldwide, elsewhere are diversified. Yet, it (and often on oil and gas producing the USA has the option – which it has the allies in question) now have many nations. Over the past decades, not yet fully taken advantage of – of more options for achieving that oil producers have been disproportionately represented on the working with other countries to bring diversification. One of these options list of countries sanctioned by the such resources on line in the future. is the purchase of liquefied natural gas (LNG) directly from the USA. But USA. The desire and the need to use The USA will remain interested and it is not simply the advent of America sanctions to advance foreign policy invested in Saudi stability, as nothing as an exporter of LNG that has objectives has not diminished. If could send a shock wave through the transformed prospects for many US anything, in a world where military global oil market more than a allies. Even more consequential have force is difficult to deploy and where collapse of the regime or the been changes in natural gas markets America’s ability to secure outcomes outbreak of violence in the kingdom. which are beneficial to consumers through persuasion alone is But America will have less of a need more generally. Thanks to increases increasingly questioned, sanctions to engage the Saudis directly to urge in production of unconventional gas, continue to play a critical role in the them to increase (or in rare instances and reduced costs associated with tool kit of US foreign policy. to decrease) their production levels; the liquefaction and transport of Yet, while the desire to use sanctions oil will no longer dominate the natural gas, global markets are more remains, some might surmise that bilateral agenda between flush with gas than they were five because the USA imports less oil and Washington and Riyadh. years ago and more integrated with virtually no natural gas today, its 2 Encouraging allies to diversify one another. The number of countries ability to wield influence through their own sources of energy exporting LNG more than doubled sanctions is diminished in the new Nowhere have US diplomats invested between 2000 and 2016, while the world of energy abundance. It is true more energy to this end than in number importing LNG tripled. The that America’s increased self- Europe. Only months after President dominance of oil-indexed pricing has sufficiency means that its power to Ronald Reagan moved into the Oval begun to give way to gas-on-gas influence outcomes through unilateral Office, he openly opposed Europe’s pricing in many parts of the world, sanctions alone is more limited to

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exceptional instances and sanctions Dangers of overreach political purposes will ultimately work that go beyond the export and import against US interests – and the country’s For decades, US policymakers of oil and gas. However, in a ability to achieve its traditional energy considered America’s energy globalized world where most diplomacy objectives. Now that the predicament a major strategic countries have complex linkages to USA is an exporter of oil and natural vulnerability. Now, they are beginning the world economy, unilateral gas – and poised to be a major global to appreciate that the improved sanctions are of limited value in any player in the latter at least – it must be energy environment brings new case. What matters much more to seen as a reliable supplier if it wants opportunities and strengths to the the US ability to affect particular global markets to continue to evolve USA – among them, a greater ability foreign policy outcomes is the in ways which – as described above – to deliver age-old energy diplomacy country’s capacity to secure the are generally conducive to American objectives. Yet dangers exist as cooperation of other nations to interests. perceptions and actions related to impose multilateral sanctions; such American energy prowess come The other danger present in today’s sanctions have much better track into line. American energy diplomacy is that records of delivering their desired the current administration perceives results. Here the new energy Policymakers may feel that such a its energy interests too narrowly and abundance actually provides the dramatic change in energy fortunes fails to appreciate how its actions and USA with a distinctive advantage, at should bring with it new, blunt tools rhetoric in other domains have major least when it comes to imposing better suited to directly shape foreign bearings on its ability to achieve sanctions on oil producing countries. policy and national security outcomes. energy diplomacy goals. The clearest As demonstrated by the recent case For example, senior members of the example of this risk is the current of sanctions against Iran, securing Trump Administration have reportedly question mark around America’s the support of other countries for urged European and Asian countries willingness to maintain its historical role sanctions against one of the world’s to buy US oil and natural gas as a in ensuring freedom of navigation and largest oil producers is easier in a way to rebalance the trade deficit safe passage of the seas. President climate of well-supplied energy – or be prepared to face penalties. Trump has publicly questioned whether markets. Like the Bush President Trump himself publicly said the provision of such public goods is Administration before it, the Obama that US exports of LNG would push too costly for the USA to sustain; Administration initially found both Russian exports out of Europe and these musings alone could be domestic and international resistance make that continent less vulnerable to damaging to the smooth functioning to ramping up sanctions intended to political blackmail. of energy markets. constrain Iranian exports of oil at a In reality, such exhortations will not time when oil prices were consistently help the USA meet its enduring energy over $100 a barrel. Many actors Conclusion diplomacy objectives, but will likely feared such sanctions would spur oil hamper its ability to do so. Many of Fears that America’s new energy prices to new levels, jeopardizing the political benefits being enjoyed prowess will contribute to the already-fragile economic growth. by the USA as a result of the new retrenchment of the USA from abroad It was only through intensive energy abundance are not because are overblown. Although the global diplomatic efforts that the USA was the new environment has presented energy environment has changed able to convince countries from India new instruments of power, but because significantly in a few short years, to China and beyond to curb their markets have changed in ways that these changes do not suggest that purchase of Iranian oil. In making the alleviate past concerns or are more fundamental US energy diplomacy case to foreign counterparts, US conducive to US and allied interests. priorities have undergone a similar officials were able to point to revolution. If anything, the new burgeoning US oil production; annual As a result, rather than looking for ways increases of more than one million in which they can use American energy ‘POLICYMAKERS MUST RESIST THE barrels of oil each year helped prowess as a cudgel to persuade initially sceptical officials address a particular problem, UNDERSTANDABLE IMPULSE TO WIELD that greater pressure on Iran need policymakers should prioritize the ENERGY AS A WEAPON … [AND] FOCUS not be synonymous with escalating smooth functioning of global energy ON THE SMOOTH FUNCTIONING OF oil prices and increased strain on markets. Any effort, or even intimation, GLOBAL ENERGY MARKETS …’ the global economy. that US energy exports will be used for

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energy abundance has simply made one. Policymakers must resist the the smooth functioning of global energy these priorities easier for the USA to understandable impulse to wield markets, which will require a better attain. Nevertheless, the road ahead energy as a weapon (as many other integration of energy policy with many for American energy diplomacy countries have done) and instead other elements of national security and is not necessarily a seamless maintain America’s traditional focus on foreign policymaking than ever before.

Trump’s energy policy: a sharp shift but markets trump Jason Bordoff

coal, and, perhaps to a lesser extent, lowering energy prices, and delivering ‘… TRUMP’S ENERGY POLICY HAS supporting American nuclear power. In large net benefits even after social PRIORITIZED INCREASED DOMESTIC a joint op-ed, Interior Secretary Ryan costs are considered. Zinke, Energy Secretary Rick Perry, ENERGY PRODUCTION AND EXPORTS Increased US exports also have and Environmental Protection Agency TO ACHIEVE AMERICAN “ENERGY significant geopolitical benefits. Administrator Scott Pruitt explained: DOMINANCE”.’ Exports of liquefied natural gas ‘An energy-dominant America means a (LNG) are transforming the USA into self-reliant and secure nation, free from a global gas superpower. Moreover, President Barack Obama’s energy the geopolitical turmoil of other nations US LNG exports, linked to a hub price policy prioritized climate change as the that seek to use energy as an economic and without destination restrictions, central piece of its legacy. By contrast, weapon.’ They went on to argue that are leading to more competition, President Donald Trump’s energy policy ‘an energy-dominant America will export liquidity, and supply diversity. This in has prioritized increased domestic to markets around the world, increasing energy production and exports to turn is gradually making the global our global leadership and influence’ achieve American ‘energy dominance’, gas market more flexible, efficient, (Washington Times, 26 June 2017). by easing regulations, opening new and secure. Europe, for example, areas to production, and expediting While ‘energy dominance’ may leave will be more able to implement its infrastructure, among other actions. something to be desired as a slogan Energy Union package, allowing it Despite the rhetoric, however, many of (importing countries tend to be wary of to reduce its vulnerability to Russian the actions Trump has announced to suppliers that want to ‘dominate’ them, gas dependence through market date will have relatively modest impacts after all), the Trump Administration integration, interconnectivity, and on energy markets and greenhouse is right to highlight the benefits of diversification. Since the US ban on gas emissions unless market increased US energy production. crude oil exports was ended in late conditions change, and even then there The turnaround in the US energy 2015, oil exports, too, have risen are limits on what the administration outlook has been stunning. Over the sharply – spiking to more than two can achieve. Other domestic policy last decade, natural gas production million barrels per day towards the changes – on sanctions, trade, and has increased by roughly 50 per cent end of 2017 – allowing markets to taxes – will be of more significance to and crude oil production has nearly work more efficiently and boosting both the global energy sector and to doubled. In 2005, it had been projected US supply, since producers can sell the global economy, as will the broader that the USA would be importing 27 per their oil at less of a discount to global geopolitical consequences of the cent of its gas use in 2015; instead, the market prices. Trump Administration’s ‘America First’ USA just became a net exporter. Net foreign policy. oil import dependence has fallen from Markets trump policy around 60 per cent to around 20 per A key focus of the Trump Unleashing ‘energy dominance’ cent in the last decade. Administration’s energy policy to date The concept of ‘energy dominance’ The shale boom has been one of the has been rolling back regulations remains murky, but based on policies strongest tailwinds supporting the US seen as hampering domestic energy and rhetoric, its focus is ramping up the economic recovery following the Great production. Yet markets will matter production and exports of oil, gas, and Recession, boosting economic activity, far more than scrapping Obama-era

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regulations in determining the outlook in any event – with higher prices and change – and the recent price rally for US energy supply, exports, and dramatic technology and productivity is a reminder that this may happen greenhouse gas emissions. improvements by American shale sooner than the ‘lower for longer’ producers. Indeed, the outlook for US crowd expects. The flip side, of course, oil production growth in 2018 has been is that environmental regulations ‘COAL’S DECLINE HAS BEEN DRIVEN BY revised downward, notwithstanding provide a hedge against changing CHEAP SHALE GAS, WEAK ELECTRICITY Trump’s regulatory rollbacks, to reflect market conditions. Without binding DEMAND, FALLING RENEWABLES COSTS, changing market dynamics. Similarly, policies, the strongest backstop to AND CHANGING DEMAND PATTERNS the administration can open up the coal’s revival, for example, is continued IN CHINA.’ Arctic to drilling, but there is unlikely low natural gas prices. And even if to be much interest to drill in the the market doesn’t change, Trump’s challenging environment of Alaska’s icy actions also undermine a regulatory Take one high-profile example – waters at recent low oil prices. framework – notably the Clean Power reviving the struggling coal industry. Plan – that could otherwise have been President Trump has repeatedly By the same token, the administration strengthened over time. promised to bring lost coal jobs can accelerate the permitting process back. Yet undoing rules such as for US LNG exports, but permits the Clean Power Plan (President have already been forthcoming for Three branches and federalism Obama’s signature climate policy to commercially viable projects (even if Beyond market forces, there are many limit greenhouse gas emissions from the process could move more quickly). other constraints on President Trump’s power plants), or lifting the temporary Rather, the greatest challenge to ability to significantly alter the US moratorium on coal leasing on federal future projects is weaker incentives to energy outlook. lands, won’t lift production or bring export – due to low global gas prices jobs back to coal country. Coal’s in customer markets and a slew of It remains to be seen how much of the decline has been driven by cheap additional volumes slated to come into sharp deregulatory push will survive shale gas, weak electricity demand, the market by the end of the decade. judicial review. Recent efforts by the falling renewables costs, and changing Department of the Interior and the To be clear, this is not to say that all demand patterns in China. US coal’s Environmental Protection Agency Trump’s policy changes are without recent rebound resulted from higher to delay or repeal Obama-era rules impact. Debottlenecking existing natural gas prices and a stronger Asian related to methane emissions from oil pipeline infrastructure, for example, can export market, not from the announced and gas operations have already been help address current constraints and regulatory changes that are yet to take reversed by the courts. More legal assist production in certain areas. On effect. A recent paper I co-authored challenges will come in 2018. LNG exports, the administration has (‘Can Coal Make a Comeback?’, Trevor been working with multilateral finance Although Republicans control Houser, Jason Bordoff, and Peter institutions to facilitate access to both the Senate and the House of Marsters, Center on Global Energy capital for LNG import facilities in gas- Representatives, Congress has Policy, April 2017) found that even if hungry countries. blocked several Trump energy all the actions in Trump’s March 2017 initiatives. For example, the Trump EPA ‘energy independence’ executive Demand-side policy changes will also recently proposed steps to dilute the order were implemented, coal still matter. Trump has signalled that he wants law requiring that a certain amount won’t be able to mount a comeback to ease the next round of fuel economy of biofuels be blended into the fuel with current market dynamics. If gas standards from 2022 to 2025, scheduled supply, a change strongly supported by remains cheap, renewables costs keep for a ‘mid-term review’ in 2018. Cancelling the oil industry. Yet powerful opposition plummeting, and coal continues to these would boost US oil demand from farm-state senators, as well as fall, the greenhouse gas targets in the by around 200,000 barrels per day in robust industry lobbying, caused Trump Clean Power Plan will be met even if the 2025, although it is unclear whether to halt the effort. The Trump budget rule is scuttled. the administration wants to go so far includes provisions to sharply cut as to cancel the increase altogether, or Similarly, reversing rules regulating energy R&D spending and some clean merely to make modifications. oil and gas production, like those energy incentives, yet there remains aimed at reducing methane emissions, Moreover, expanding access to support for these in Congress. In may help output on the margin, but mining and drilling provides firms May, Congress also failed to approve US oil supply was set to rise sharply with an option if market conditions a measure, backed by the Trump

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Administration, to repeal a Department Energy and climate diplomacy Economic Council Director Gary Cohn of the Interior rule regulating methane explained in a joint op-ed: ‘[T]he world The Trump Administration’s highest emissions from oil and gas production. is not a “global community” but an profile international action on arena where nations, nongovernmental Even within the executive branch of energy and climate change by far actors and businesses engage and the US government, ‘independent’ was its decision to withdraw from compete for advantage.’ (‘America First agencies partly or wholly insulated the Paris climate agreement. The Doesn’t Mean America Alone’, The Wall from presidential control can impede Paris Agreement has no binding Street Journal, 30 May 2017.) President President Trump’s agenda. For requirements regarding actual Trump struck a similar ‘America First’ example, Energy Secretary Perry emissions levels. The USA is free chord in his speech to the UN General recently ordered the Federal Energy to revise its Nationally Determined Assembly in September. Regulatory Commission to consider Contribution (NDC) either up or down. guaranteeing recovery of costs to Even if the USA had stayed in Paris, In addition, withdrawing from Paris prop up uneconomic coal and nuclear this administration would almost undermined a framework designed plants in the name of grid reliability certainly have still reversed many to ratchet up climate ambition over (although there’s scant evidence domestic climate change policies. time – as technology advances, the that the growth of natural gas and Moreover, the earliest date at which urgency of climate action increases, renewables at the expense of coal and US withdrawal could take effect is four and experience demonstrates that all nuclear has actually led to reliability years after the Paris Agreement came major emitters are taking meaningful problems). This move would represent into force – which happens to be one action and which policies will be the largest regulatory intervention in day after the US presidential election most effective. After all, the Paris electricity market design in decades in November 2020 – and a future commitments alone were far from and could change the coal and nuclear president can quickly re-join. adequate to meet the agreed goal of outlook significantly. Yet, the ultimate keeping temperature rise below 2 °C. The importance of Trump’s decision authority to implement Secretary Perry’s With the USA out of the agreement, to withdraw, therefore, is less about order rests with FERC, an agency that other nations are more likely to worry US climate policy and more about acts independently from the White about bearing even greater costs to the damage to America’s global House (although three of the five reduce emissions while the world’s leadership, credibility, and diplomatic FERC commissioners will soon be second-largest emitter refuses to do relationships. Withdrawal from Paris Trump appointees). so. US leadership was essential to was not only about this administration’s Finally, under the US federalist system, success in Paris, and it will be harder to scepticism that climate change is an much energy policy is actually made sustain momentum for further progress urgent problem. Viewed alongside at the state level, not the federal level. as the USA retreats. America’s abandonment of the In the power sector, for example, state Trans-Pacific Partnership, threats Finally, by withdrawing from Paris, the public utility commissions regulate to cancel the North American Free Trump Administration has handed over retail electric services and rates. Trump Trade Agreement, refusal to certify a key tool of diplomatic and economic may want to unleash shale production, the Iran nuclear agreement, or even leadership to other nations, notably but states are the primary regulators its initial refusal to endorse NATO China. China clearly perceives an of oil and gas production. In my state Article 5’s pledge of mutual defence, opening in international climate of New York, for example, hydraulic the decision to withdraw from Paris negotiations that will enable it to fracturing is not currently allowed, and reflects a nationalist view of foreign accelerate its strategic alignment with pipelines are very difficult to permit and policy whereby American prosperity Europe and its pursuit of soft power, build. California is entitled to set its own derives less from cooperation and just as its massive ‘belt and road’ fuel economy standards, which other a rules-based order than from zero- initiative aims to enhance its global states can adopt (a dozen have done sum competition. As National Security power and create commercial so). Negotiations with California may Advisor H.R. McMaster and National opportunities for Chinese firms in large limit how much the administration can energy, infrastructure, and other projects. roll back the next scheduled round of fuel economy hikes. Many states also ‘… THE DECISION TO WITHDRAW FROM In other energy diplomacy realms, the have standards for renewable energy PARIS REFLECTS A NATIONALIST VIEW OF Trump Administration has kept to the generation and even their own cap- FOREIGN POLICY …’ course followed by past administrations and-trade systems. by reaffirming America’s commitment

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to global energy governance, routes to Europe. The implications exports and imports of natural gas continuing strong engagement and for international firms backing Nord with free trade agreement (FTA) support at the International Energy Stream 2 could be profound (although countries undergo a very simple Agency. US energy diplomacy has the Trump Administration is not keen regulatory process. But those with been hampered somewhat, however, to exercise that authority). The Trump non-FTA countries are subject to a far by the slow pace of staffing in the US Administration also imposed sanctions longer, costlier, and more burdensome government and by attrition. in response to Venezuelan President regulatory approval process. Trump’s Nicolás Maduro’s recent power grab; threats to cancel the North American it also considered, but ultimately Beyond energy policy Free Trade Agreement (NAFTA) raise rejected, sanctioning Venezuela’s oil the risk of new regulatory burdens While the impact of energy policy sales, which would have had significant on sharply rising US pipeline gas changes on global energy markets impacts on the oil market, as well as on exports to Mexico. And Trump’s may be limited with current market US refiners. decision to withdraw from the Trans- conditions, policy shifts beyond energy The risk of sanctions hitting energy Pacific Partnership means that a will be far more consequential – namely markets is at its greatest following simpler export approval process those related to sanctions, trade, tax, Trump’s recent decertification of will not apply to gas-hungry Asian and foreign policy. the Iran nuclear deal. Despite the markets. It is far from clear, however, headlines, the move does not ‘tear that NAFTA will be scuttled entirely. ‘… THE USA IS INCREASINGLY TURNING up’ the Iran deal. Rather, it triggered As noted above, Trump’s rhetoric is often more extreme than the actual TO SANCTIONS AS A TOOL OF ECONOMIC a provision allowing Congress to take expedited action reimposing sanctions policy changes implemented. Indeed, STATECRAFT TO ACHIEVE FOREIGN on investment in Iran’s energy sector the possibility of renegotiating NAFTA POLICY AIMS.’ or on purchases of Iranian oil. But in (which barely covered energy) January President Trump must decide presents an opportunity to liberalize As explained in a new book (The Art of whether to extend the waivers of the energy trade and investment, boost Sanctions) from the Center on Global sanctions, whatever action is taken by American exports of natural gas and Energy Policy by Richard Nephew, to Congress. Failure to make a decision refined products to Mexico, and steady be released in January 2018, the USA would also reimpose oil sanctions. Mexico’s energy sector reforms against is increasingly turning to sanctions However, even if Congress takes no shifting domestic political winds. as a tool of economic statecraft to action and Trump does extend the The potential for tax reform, a top achieve foreign policy aims. Having waiver, political pressure to take priority of the Trump Administration deepened the government’s capacity some tougher action against Iran – and Congressional Republicans, to implement and enforce sanctions perhaps through non-nuclear might also have significant effects for following the recent additional sanctions (such as targeting the energy sector, either through a sanctions against Iran, policymakers Hezbollah) – is likely to build in 2018 lower corporate income tax rate or the are more prone to turn to sanctions if Trump continues to extend waivers implementation of reforms to pay for as a policy when confronted by thorny but does not certify Iranian problems, with few other desirable compliance. In such a case, Iran’s it (these reforms could target existing alternative responses. own domestic politics may leave it incentives for oil, gas, and coal, as well with no choice but to say that the as renewable energy). Cuts to these tax Such a proclivity for sanctions risks USA has violated the nuclear deal subsidies, however, seem unlikely at overusing them and may even make and act accordingly, which could present given political support for them, them less effective, or run a high lead to a complete unravelling of the and the many challenges to broad tax risk of unintended consequences. It Joint Comprehensive Plan of Action reform in general. also poses new risks to the energy (JCPOA). And even if sanctions aren’t sector. Congress recently took action re-imposed, uncertainty around their ‘… THE ENERGY SECTOR WILL BE MORE to punish Russia for its interference future will have a chilling effect on new in the 2016 US elections by passing AFFECTED BY MARKET CONDITIONS investment in Iran’s oil and gas sector. new sanctions that, among other AND BY OTHER DOMESTIC AND FOREIGN targets, give the President the Changing US trade policy could also POLICY CHANGES THAN BY THE NEW discretion to sanction companies have significant effects on global DIRECTION OF US ENERGY POLICY.’ that invest in new Russian pipeline oil and gas markets. Under US law,

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In foreign policy, Trump’s tough talk Qatar embargo) is straining some US In short, Trump’s energy policy and ‘America First’ approach (rhetoric diplomatic relationships and raising represents a sharp shift, yet the energy concerning North Korea and Iran, uncertainties and risks that could sector will be more affected by market threats of a trade war with China, and adversely impact some firms in the conditions and by other domestic and mixed messages in key regions like global energy sector – even as they foreign policy changes than by the new the Persian Gulf – for example on the may create opportunities for others. direction of US energy policy.

‘Energy dominance’: the right goal for US policy? Daniel Raimi

Over roughly the past decade, natural about to drown the global market in ‘… THE USA HAS SURPASSED SAUDI gas and oil production have increased hydrocarbons. This is due largely to ARABIA AND RUSSIA AS THE WORLD’S in the USA at an unprecedented speed the fact that the US economy, despite and scale. The application of innovations LARGEST PRODUCER OF OIL AND improvements in energy efficiency, is still (including horizontal drilling and NATURAL GAS, RESPECTIVELY.’ the second-largest energy consumer in hydraulic fracturing) to ‘unconventional’ the world, trailing only China. rock formations such as shale has In recent years, the USA has And while net energy exports may move been the primary cause of this surge. surpassed Saudi Arabia and Russia as into positive territory in the coming Alongside the robust debate over the the world’s largest producer of oil and years, these new supplies on the global economic benefits, environmental risks, natural gas, respectively. A net energy market will not upend the importance and other implications of the shale importer for decades, the USA could of traditional energy powers like Saudi revolution (explored in my forthcoming become a net exporter by around Arabia and Russia. In 2016, for example, book, The Fracking Debate), federal 2020, under one optimistic scenario Russia and Saudi Arabia each exported, policymakers in the USA have (see the figure below). in net terms, more than 8 million barrels introduced a new term into the energy OEF 111So is figure the USA corrections on track to become per day (mb/d) of crude oil and refined lexicon: ‘energy dominance’. ‘energy dominant’? And if so, is products such as gasoline and diesel. In a June, 2017 op-ed in the Washington ‘dominance’ desirable? Despite the Compare this with the USA, which in optimism induced by the emergence of Times, the leaders of the US Department

2016 was a net importer to the tune of of Energy, Department of the Interior, US shale, the answer to both of these 5.3 mb/d (BP Statistical Review of World and Environmental Protection Agency two questionscolumns is no. Energy, 2017). argued that: ‘An energy-dominant Nor will the shale revolution sate the America means a self-reliant and secureUS netIs the energy USA likely exports to become ‘energy dominant’? demand of rapidly growing economies nation, free from the geopolitical turmoilSource: Annual Energy Outlook 2017, US Energy Information Administration. First, the USA, despite the renewed such as China or India. Consider this: of other nations that seek to use energy vigour of its oil and gas sector, is not in 1980, the USA produced about as an economic weapon’ (Washington Times, 26 June 2017). historical projection These federal officials have good reason to be optimistic about the future of energy in the USA. Growing oil and net exports tu gas production has: net imports boosted the economies of dozens of US regions, quadrillion B US net energy exports reduced energy prices for (High oil and gas scenario) consumers, reduced emissions of carbon dioxide and other pollutants by displacing US net energy exports coal-fired electric power (for natural gas). Source: Annual Energy Outlook 2017, US Energy Information Administration.

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24 per cent of all the energy consumed But increased oil production does nothing in the world. In 2016, despite the rise of the sort. Because global oil prices ‘DEEPER INTEGRATION INTO – RATHER of shale, rapid growth in global energy move more or less in tandem with one THAN ISOLATION FROM – GLOBAL demand pushed this figure down another, a disruption in one corner of ENERGY MARKETS BENEFITS to about 15 per cent. Look forward the world will quickly translate into a CONSUMERS AND PRODUCERS.’ another 25 years, and even under an price spike for all consumers, regardless of the amount they produce at home. optimistic scenario for US oil and gas Before turning to the question of Geopolitical upheaval in any major production, the number falls further whether ‘energy dominance’ would be producing nation – say, a coup in to 13 per cent by 2040 (see the figure desirable, consider for a moment the Venezuela or a war between Saudi below). word itself. ‘Dominance’ evokes Arabia and Iran – would immediately images of athletes such as Roger And scale isn’t the only reason why translate into a price spike for US, and Federer, Serena Williams, or Usain Bolt, ‘energy dominance’ is unlikely. That’s global, consumers. And while a price able to bend opponents to their will or because the logic of the market, spike would benefit US producers, it fly past them to the finish line. rather than the logic of geopolitics, would not stifle the howls of anger that In today’s energy world, there is no determines energy trade flows. While would emanate from petrol stations Roger Federer. Even the Organization increased production of oil and natural across the USA. of Petroleum Exporting Countries gas has indeed strengthened the If it were truly self-reliant in terms of oil (OPEC) – the closest thing the energy USA’s hand in negotiations with production, could the USA somehow world has to a ‘dominant’ player – has nations including Russia and Iran, it isolate itself from the global market? In struggled mightily in recent years to does not allow US policymakers to theory, yes, but such an approach would exert some control over consistently dictate trade flows. create far more problems than it would low oil prices. US oil and natural gas For example, a substantial share of solve. As recent experience with Hurricane producers, while re-emergent as recently increased crude oil exports Harvey has shown, extreme weather major players, do not have OPEC’s from the USA has effectively gone to events can cause enormous disruption market power, let alone that of John Venezuela, hardly a close ally. (To be to energy infrastructure, highlighting the D. Rockefeller in the late 1800s and precise, these exports go to the island critical importance of access to global early 1900s, or the Texas Railroad of Curaçao, where a Venezuelan- markets in the wake of domestic Commission from the 1930s through owned refinery blends US light oil with disruptions. What’s more, isolating the the 1960s – see Bob McNally’s recent heavier Venezuelan crudes.) USA from global markets would deprive book Crude Volatility (Robert McNally, Figure 3> domestic oil and gas producers of what Center on Global Energy Policy, More importantly, the op-ed they have lobbied to achieve in recent two column January 2017) for more on this. mentioned above nods toward another years: access to international buyers catchphrase – ‘energy independence’ through increased exports. In short, Is US energy ‘dominance’ desirable? US primary– when energyit states thatproduction the USA can and be global a deeperprimary integration energy intodemand – rather than Sources:‘self-reliant Annual Energy and secure Outlook nation, 2017, free US fromEnergy Informationisolation from Administration – global energy, and markets International Now Energy we Outlookcome to the second 2016. the geopolitical turmoil of other nations’. benefits consumers and producers. question: even if ‘energy dominance’ were achievable, would it be desirable?

Here, again, we need to try and historical projection

understand what advocates mean Btu when they use the term ‘dominance’. Global energy demand If the goal is to become self-reliant, walled off from global markets, it is quadrillion US energy production clear that dominance is not desirable (High oil and gas scenario) for the reasons described above.

But what if the goal is to become the Serena Williams or Usain Bolt of US primary energy production and global primary energy demand energy? Why wouldn’t the USA want to Source: Annual Energy Outlook 2017, US Energy Information Administration, and International Energy Outlook 2016. bend adversaries to its will?

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First, the USA and other energy importers As an analogy, the USA receives the portfolio. As Hurricane Harvey have argued for years that energy large majority of its imported oil from starkly demonstrated, access to should not be used as a geopolitical Canada, but no American leader would crude oil may not be enough to weapon. Following the politically accede to being ‘dominated’ by their prevent disruptions for consumers, motivated Arab oil embargo of 1973, northern neighbour. No American particularly if refineries are rendered North American, European, and leader would be willing to be seen inoperable. developed economies in Asia banded as capitulating to other (non-energy) 3 Policymakers can reduce exposure together to create the International Canadian priorities for the sake of to volatile energy prices by Energy Agency, which was founded in secure energy supplies. The same promoting energy efficiency, a large part to prepare for any future logic holds true for US allies, who long-held goal of the IEA. In the attempt by oil-rich powers to use energy would never want to be seen as the USA, Corporate Average Fuel as a cudgel in international negotiations. subordinate partner to US ‘energy More recently, US leaders have sought dominance’. Economy (CAFE) standards mandate to constrain Russia’s ability to wield the certain levels of vehicle efficiency, energy weapon against allies in Eastern and their expansion is currently under How can government promote a better and Central Europe. review by the Trump Administration. energy future? Rules on furnaces, air conditioners, With its recent resurgence as an energy So if energy dominance is neither and other appliances can also producer, is the USA really prepared achievable nor desirable, what can advance energy efficiency (though to abandon these long-held principles government do to bolster a better these would reduce consumption of and explicitly lord ‘energy dominance’ over other nations? If so, allies and foes energy future? natural gas and electricity, rather than oil). Such measures enable alike would take notice, then wonder 1 Policymakers must recognize the consumers to get more bang for their whether the USA remains an advocate value of deeper integration into energy buck. In other words, the for open markets, or whether it is global energy markets. Unlike simplest way to reduce ‘dependence’ moving down the path of the nations ‘energy independence’, deeper on a thing (such as imported oil) is to whose use of the energy weapon it integration provides newly resurgent use less of that thing. once scorned. US producers with access to the Second, if it seeks to ‘dominate’ other best markets, and adds resiliency 4 The shale revolution has provided the nations with its energy resources, that against price spikes for energy USA with abundant natural gas, dominance won’t necessarily come at the consumers. opening up a remarkable opportunity expense of the USA’s geopolitical foes. 2 Energy resilience – the ability to to displace coal-fired electric power, respond to disruptions – is a crucial thus reducing greenhouse gas emissions at low cost. But this ‘DOES THE UK, JAPAN, OR ANY OTHER objective, and can be improved by opportunity will only be realized if NATION WANT TO BE “DOMINATED” BY smart planning. Members of the International Energy Agency are well-crafted public policies steer the THEIR ENERGY SUPPLIER? OF COURSE NOT.’ obligated to hold a large volume of USA towards a low-emissions future, crude oil in storage, which can be such as the one envisioned under the Does the UK, Japan, or any other deployed fairly quickly to reduce the 2015 Paris Agreement. Leadership nation want to be ‘dominated’ by their harms of energy disruptions, whether on this issue would position the USA energy supplier? Of course not. The caused by geopolitical conflict or at the forefront of the global notion that elected leaders in these natural disasters. But the USA can community, providing a model for nations would be expected to bend the go further by including gasoline, other nations to follow, rather than knee to a benevolent energy supplier is diesel, and other refined petroleum seeking to ‘dominate’ its way to the politically untenable. products as part of its storage future of energy.

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US shale gas: view of the domestic market Michelle Michot Foss

Snapshot overview and methane, shipped as liquefied in our sample (‘CEE sample’) has natural gas or LNG) but also refined shifted somewhat with mergers and As oil prices slipped during the products and intermediate chemicals. acquisitions over the years, but we extended decline between mid-2014 The Lower 48 states, particularly along have revised our dataset accordingly. and early 2016, a persistent question the Gulf Coast, are experiencing an These companies represent roughly a was whether the US domestic oil historic build-out of midstream – field third of US liquids and gas output and and gas producers – increasingly gathering, processing, pipelines, and they have deployed the most advanced wedded to tight rock plays – would storage mainly for liquids – and export- technologies and drilling practices as be able to adjust and forge ahead. focused projects and capacity. they worked to optimize results. In fact, most already had adjusted and forged ahead, moving out of Most of the chatter about US activity ‘THE VAST US OIL AND GAS INDUSTRY methane-rich locations as the Henry tends to focus on drilling strategies to: Hub price collapsed during 2007–8. By SYSTEM IS MARKED BY COMPLICATED lengthen horizontal laterals; all accounts, that adjustment process DYNAMICS ACROSS HIGHLY FRAGMENTED has continued, with US production VALUE CHAINS …’ increase the size and improve the of liquids and gas remaining at high positioning of ‘fracs’ along wellbores; levels. Crude oil output remains near develop larger pads that enable In assessing the situation and the 1970s highs, at more than 9 million drilling and completion of multiple prospects for US domestic shale gas barrels per day. The tight rock plays wellbores with minimal movement of tend to be characterized by ‘gas going forward, readers should keep rigs and improved scheduling of drives’. As wells are drilled, completed several key points in mind – mainly drilling and completion services. and fractured, and pressures drop, gas with regard to overall upstream comes out of solution providing the performance and the upstream– These factors are all important, but ‘push’ to move liquids into wellbores for midstream interface. The vast US oil results tend to be uneven and highly capture. This push creates the hallmark and gas industry system is marked by dependent upon drilling locations, of tight rock production: the very steep complicated dynamics across highly given the marked variability within initial production rates followed by fragmented value chains that require basins. interdependence among intensely subsequent, equally steep, declines. From our analysis we can see that competitive business segments. This In all, the rush to compete for and the most significant impacts have situation, along with the predominance develop tight oil acreage has sustained come from improvements in acreage of private surface land and minerals US domestic gas supply near 90 million portfolios – buying and selling aimed ownership, nimble and deep capital cubic feet per day. In effect, the US at increasing a company’s holdings markets, and – thus far – light-handed ‘shale’ gas component is now largely of the best, prime ‘sweet spot’ drilling regulation, makes the US situation a by-product of the industry’s ability locations. The better the drilling to sustain liquids (including natural unique. We wonder, in fact, whether our location, the greater the impact from gas liquids or NGLs) investment and situation is so unique that our ability to deployment of technology. Companies production, and must be understood in commercialize tight rock plays, at the achieving the best performance results that context. level achieved thus far, will remain a US-centric experience. have gained considerable ground The USA is well supplied with domestic through supply chain management; oil and gas production, so much so this includes driving down the costs of What, really, is happening upstream? that commercial responses have services and supplies, such as sand focused largely on exports. These Since 2009, we at the Center for Energy used to prop open fractures along constitute not only raw materials Economics (CEE) have benchmarked wellbores and can even cover outright (light oil and condensate in excess a group of ‘best in class’ producers ownership of suitable sand resources. of that needed by US refineries for that have become almost completely As activity grows within basins and feedstock; processed natural gas wedded to onshore tight rock plays. sub-basins, operators are better able liquids such as ethane and propane; The population of 16 companies to develop efficient supply depots and

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two column

NOVEMBER 2017: ISSUE 111 CEE sample, operating cash flow and capex, $/BOE Source: CEE analysis of SEC annual returns for 16 companies operating in domestic, onshore tight rock plays.

45 and free (after dividends and capex) CF Capex 40 cash flow is surprising to many. The 35 lack of cash for reinvestment keeps US 30 producers dependent upon external 25 capital. So long as capital markets 20 remain enamoured of US tight rock 15 plays, funding will continue to be 10 available, in some form, to domestic

$/barrel $/barrel of oil equivalent 5 operating companies. Over time, 0 however, funding has shifted toward 2009 2010 2011 2012 2013 2014 2015 2016 more exacting forms, with increasing CEE sample, operating cash flow and capex, $/BOE control demanded by capital providers Source: CEE analysis of SEC annual returns for 16 companies operating in domestic, onshore tight rock plays. (mainly those arranging private and public equity). US producers and their backers have been quick to field service contracting. Some of the take advantage of any opportunity to most marked improvements in cost ‘… THE ENTIRE, GLOBAL INDUSTRY FOR hedge forward production, cushioning performance have been achieved in YEARS HAS STRUGGLED TO CONTAIN revenues and cash flows at least to operational logistics. These range from COSTS THAT ESCALATED WITH THE PRICE some extent. Hedging has helped the use of advanced data systems that OF OIL AND OTHER COMMODITIES.’ to remediate a persistent challenge speed up transfer of real-time data and – most producers do not get the full decision making during drilling, to the broader industry patterns on a shorter traded price of their commodities. more mundane but – in the vast West This is because of ‘field to market’ term, quarterly basis (see the figure and South Texas basins especially – bottlenecks that create and preserve below). This reality underlies the significant improvements in reducing wide differentials and/or because of current struggle to reconcile reported the time required to transport people production quality (the lighter the oil, drilling results and production gains and equipment to drilling locations. the drier or more methane-rich the with continued lack of profitability for gas, the lower the value back to the For all of these exciting developments, producers. Indeed, the entire, global wellhead). the most

observation over time industry for years has struggled to has beenthree the column inability for the greater contain costs that escalated with the In a low commodity price environment, producer community to hold capital price of oil and other commodities. costs challenge earnings (see the expenditure (capex) spending within Given the dominance of plays that are figure overleaf). The US industry has cash Quarterlyflow (see the operating figure above). cash flow soless widely capex, considered CEE sample to be attractive and larger industryentered a phase group in which debate swirls Our monitoringSource: CEE of analysisannual corporate and author aggregation(and safer) of datainvestments on more in thana low 70 oil companiesand around covered which by targetsBernstein investors may returnsResearch. on a full-cycle Data usedbasis withreflects permission. gas price world, the lack of operating prefer, going forward. Thus far, the

3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 -

(5.0)

(10.0) (15.0)

(20.0)

(25.0)

(30.0) $/barrel $/barrel of oil equivalent (35.0) Industry Average CEE Group Avg (40.0)

Quarterly operating cash flow less capex, CEE sample and larger industry group Source: CEE analysis and author aggregation of data on more than 70 companies covered by Bernstein Research. Data used with permission.

OXFORD ENERGY FORUM 19

two column CEE sample, total costs and EBITDA Notes:WHAT’S NEXTTotal FOR cost US ENERGYincluded POLICY? capex and opex. EBITDA = earnings before interest, income taxes, depreciation, and amortization. Source: CEE analysis based on company returns.

80 development risks and uncertainty lies Total Cost EBITDA 70 in the midstream sector. 60 50 The upstream–midstream interface: 40 who pays? 30 The advent of master limited 20 partnerships (MLPs), fostered by a

$/barrel $/barrel of oil equivalent 10 tweak in US income tax rules, led 0 to the emergence of a large and 2009 2010 2011 2012 2013 2014 2015 2016 still growing class of independent CEE sample, total costs and EBITDA midstream providers. The USA has Notes: Total cost included capex and opex. EBITDA = earnings before interest, income always hosted independent midstream taxes, depreciation, and amortization. businesses, but the MLP structure Source: CEE analysis based on company returns. has supported an acceleration in the scale and scope of independent midstream activities. The attractiveness emphasis has been on production too high while another argues they are of income tax implications commended growth, essential if companies are too low. Flare ups over data and the MLPs to investors and encouraged to be able to successfully overcome influence of data on commodity trading producers to shed their midstream the fierce decline curves associated occur periodically. A more difficult assets because they could monetize with tight rock reservoirs, but costly problem is whether underlying risks them (and obtain much needed especially with regard to capex. Large and uncertainties in ‘unconventional’ capex for drilling). In some cases this capex spending generates pools of plays are being vetted properly, given meant spinning off midstream assets depreciation that in turn constitute the the difficulty of transitioning resource that producers had newly created, to bulk of operating cash flow, the essence assessment and reserves estimation solve commercialization dilemmas. of the tight rock ‘treadmill’. This past practices from ‘conventional’ plays, Wide basis differentials have been the year, a pronounced shift has taken which are much better understood. Our hallmark of US abundance. Strong place toward earnings and returns. main concern is how operational data disparities between the US traded Pressure has grown on companies reported by companies is perceived. light sweet crude price and Brent, very to rein in capex but operating Producers tend to emphasize their best low to negative wellhead netbacks in expenditures, opex, also is a target. wells and results. Current well results most basins, and the influence of the do not predicate future performance. very cheap US traded methane price Clearly, the picture would brighten As drilling strategies become more on domestic natural gas realizations with commodity price appreciation. complicated, in particular with reduced impacted strategies. Basis differentials US production has become a major spacing and large multi-well pads, an spurred midstream investment, but factor in how commodity traders issue is whether estimated ultimate a parallel shift in midstream finance, and investors worldwide view oil recoveries may be overstated given from volatility-based commitments to supply–demand balances, principally the possibilities of interference as new fee-based contracts, also unfolded. because the US role as a large ‘child’ wells steal from the original The search for risk mitigation, coupled importer has diminished. With regard ‘parents’. Companies can deploy with supply abundance, shifted to the quality of production data, strategies to minimize these impacts, midstream investment from ‘demand there are many vigorous disputes. but at a cost. Another worry is whether pull’ to ‘supply push’, putting producers One camp argues that production analysts tend to inflate or overstate their on the hook. Producers have had to estimates, principally those provided views on estimated ultimate recoveries, provide financial backing in the form to the public domain by the US Energy given their ‘sell side’ bias. But finally, of volumetric commitments – with Information Administration (EIA), are when it comes to unconventional take-or-pay (TOP) obligations – in order oil and gas development, a key to ensure sufficient gas processing; ‘PRESSURE HAS GROWN ON COMPANIES consideration is whether development liquids and gas transportation TO REIN IN CAPEX BUT OPERATING risk and uncertainty, as opposed to (pipelines, rail, trucking, and so on); EXPENDITURES, OPEX, ALSO IS A TARGET.’ exploration, is taken too lightly. One and liquids storage capacity. This is an of the more significant sources of ironic circumstance for producers who

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two column

CEENOVEMBER consolidated 2017: ISSUE 111 analysis 2009–16 of producer cash flows with midstream revenues and midstream opex costs shown within boxes Source: CEE analysis based on company financial reports.

60 methane-dominant areas meant that gas processing, ethane fractionation, 50 and solutions for condensate would 40 be required.

30 The lag in midstream build-out exacerbated producer cash flow 20 shortages and ultimately burdened $/barrel $/barrel of oil equivalent 10 capex and opex commitments. As usual, the upstream, midstream, and - downstream all move to the beats of different drummers. The growth of a separate midstream sector involving, in many cases, de-integration of combined producer–midstream assets, may increase the chance of vertical CEE consolidated analysis 2009–16 of producer cash flows with market failure given the very different, midstream revenues and midstream opex costs shown within boxes and often conflicting, positions of

Source: CEE analysis based on company financial reports. participants.

once held midstream assets. Once into our category. Costs associated with ‘THE PUSH TO ENABLE MORE FREEDOM volumetric commitments are taken, midstream requirements have grown to FOR PRODUCERS TO EXPORT ENHANCES producers must meet the throughput become a dominant component of THE EFFICIENCY OF THE US PETROLEUM TOP fee obligations. producer opex (see the figure below). AND GAS SYSTEMS.’ Our producer benchmarking cash flow Early into the escalation of tight rock waterfalls (see figure above) are plays, it became clear that ‘field to The push to enable more freedom for indicative of both revenues from market’ connections would need to be producers to export enhances the midstream activities as well as the opex re-plumbed to support the growth of efficiency of the US petroleum and gas commitments. Midstream costs are onshore production: systems. Export capacity expansion is incorporated in general and new rights of way would be needed dominated by independent midstream, and marketing (G&A and for pipelines; merchant players as well. The gambit Marketing in the waterfall chart is to send relatively cheap US methane two column new flows would impact traditional provided on a 2009–16 consolidated into global markets as LNG has been ones, especially for methane; CEEbasis sample for our sample producer of companies). opex costs as remarkable a reversal in fortunes as Source:Some companies CEE analysis report based transportation on company financialthe shift reports. in upstream capex to the resurgence in growth of crude oil costs separately; we incorporate these liquids-rich locations and out of production. The USA had been thought to be gas ‘short’ and consequently a major prospective LNG importer. We 30 Production Cost Exploration Cost Non-income Tax G&A Mktging estimate that roughly $65 billion has been ploughed into LNG export 25 capacity, with possibly more to come. 20 Yet, currently, all of the upside in the LNG value chains resides with the 15 midstream developers and their 10 backers but especially with traders who typically treat liquefaction as sunk cost. $/barrel $/barrel of oil equivalent 5 Producers take the Henry Hub price,

0 with the central idea being that exports 2009 2010 2011 2012 2013 2014 2015 2016 help to provide a floor. For now, LNG CEE sample producer opex costs exports and robust exports to Mexico Source: CEE analysis based on company financial reports. and some to Canada appear to be

OXFORD ENERGY FORUM 21 WHAT’S NEXT FOR US ENERGY POLICY?

sustaining the Henry Hub basis. Closing thoughts on policy inferences Certainly, for some time, the drivers ‘ENORMOUS RUCTIONS ARE TAKING The USA remains the most open, usually looked to for guidance on Henry PLACE … AS GAS GENERATORS, THE competitive marketplace for oil and Hub forward prices – seasonality, ONLY COMPETITIVELY DISPATCHED gas industry investment. As long storage, competition between methane POWER SOURCE, ATTEMPT TO SURVIVE as liquids prices are sufficiently and coal in the electric power sector attractive, domestic gas supply and SUBSIDIZED RENEWABLES.’ – have not been reliable. commercialization, including exports, A distinct unknown is whether US can continue. Liquids prices support arguments that the USA should not customers and consumers might be upstream investment. The large remain on the ‘gas bridge’ any longer than needed became pronounced. susceptible to sharply higher prices for increment of methane associated with liquids-rich drilling targets (roughly Views were, and are, that additional natural gas if international LNG prices 30–40 per cent of supply) ensures commitments to pipelines would prove consistently more attractive while cheap feedstock for domestic use, only lengthen fossil fuel dependency internal demand continues to firm and petrochemicals, and exports. regardless of the clean burning grow. Analyses of the impact of US attributes of methane. These views LNG exports on domestic prices have Even with producer commitments for persist in spite of new worries about largely been sanguine. However, a time midstream investment, natural gas the reliability of gas delivery for direct almost certainly will come in which remains stranded in various locations. heating and electric power generation. US customers and consumers must Bottlenecks will be more easily solved Enormous ructions are taking place in be willing to pay to keep domestic in the western basins, especially West US power markets, as in the UK and methane in US markets. Australia’s Texas, where Permian gas supply elsewhere, as gas generators, the regulatory review of the influence of is expected to surge as midstream only competitively dispatched power LNG exports on domestic prices may processing and transportation source, attempt to survive subsidized prove to be a lesson. For this reason, constraints are dissipated. renewables. while the build-out of LNG export Elsewhere, continued delays and Much of this is aggravated by the capacity is the more typical news, the opposition to pipelines and other persistent low gas price environment more than $100 billion being poured gas infrastructure represent the more – an artefact of the perils (or into petrochemicals is likely to have a significant policy and regulatory conundrums) of resource bigger, longer lasting impact. challenges. Pre-2016 national elections, abundance – at least for now.

The impact of US LNG exports on the international LNG market Howard Rogers

Background and context 36 bcma to 179 bcma (in 2011 US footed by the ‘shale gas boom’, had total gas consumption was 693 bcma). resulted in billions of dollars-worth of In the context of an established, self- ‘stranded assets’. sufficient North American natural gas The second, initiated by the US market for most of the 20th century, ‘Independent’ upstream players, and the onset of a steady decline in US catalysed by the then high domestic From ‘lost LNG market’ to ‘world-scale domestic production from 2001 to 2005 gas price, was to combine horizontal LNG supplier’ prompted two parallel strategies: drilling and fracking technologies to The next chapter in the story exemplifies exploit shale gas. The first was the development of the arguably unique entrepreneurial LNG supply chains (most notably By 2011 US domestic production was characteristics of the US energy sector. from Qatar) and the construction of 27 per cent above its 2005 low point As the Henry Hub price of US gas fell new LNG import (regas) facilities in and US LNG regas terminal utilization (with supply growth outstripping the USA. Between 2005 and 2011 was just 5.6 per cent. Clearly the US domestic demand), the upstream and US LNG import capacity grew from regas investment strategy, wrong supporting service industries embraced

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intense technological and operational export capacity of these projects totals cent) of feedgas procurement, adaptive learning to reduce drilling 91 bcma, which is not far short of representing transport costs to the times, increase well productivity and Qatar’s 2016 output of 104 bcma (see facility and gas consumed (providing stepped-out to develop new shale gas the table below). energy) in the liquefaction process. In geographies (‘plays’). At the same some cases the terminal owner The ‘First Wave’ US LNG export project time, the widening spread between procured the gas on behalf of the economics were based on the Henry Hub and European Hub and offtaker, in others the off-taker procured fundamentals prevailing prior to the gas Asian LNG prices provided the ‘Eureka and delivered the gas to the facility. and subsequent oil price fall of 2014. moment’ for some of the US regas At that time the fully built-up cost of US The limitations of this business model owners: namely the conversion of these LNG delivered to Asian markets was became apparent when oil prices (and facilities to liquefy US gas and export it less than that purchased by Asian buyers hence oil-indexed Asian LNG contract as LNG. on a long-term contract linked to a crude prices) and European hub prices (and oil price in excess of circa $80/bbl. The by arbitrage Asian LNG spot prices) fell ‘THE OBAMA ADMINISTRATION WAS generalized model for the US export in 2014. Suddenly the fully built-up cost PERSUADED THAT LNG EXPORTS WERE IN projects was that the ‘incumbent’ US LNG offtake contracts were more THE NATIONAL ECONOMIC INTEREST …’ terminal owners signed offtake/tolling expensive in terms of delivered cost contracts with LNG importers and than the prevailing destination market ‘portfolio players’ in order to raise alternatives. However, given that the The ‘first mover’ was Cheniere, who finance to add liquefaction and other liquefaction fee ($2.5 to 3.5/MMBtu) initiated applications in mid-2010 incremental facilities to regas terminals was a ‘fixed commitment’ (along with and whose Sabine Pass (train 1) (in the case of all but Corpus Christi any long-term chartered LNG shipping facility exported its first LNG cargo which is a ‘greenfield’ development). and, in the case of Europe, regas in February 2016. The establishment The off-takers committed to pay a capacity charges) it still made sense of the regulatory approval process liquefaction fee of between $2.5 and for offtakers to export US LNG – for subsequent projects awaited the $3.5/MMBtu of contracted capacity provided destination market prices conclusion of political debate between whether they used it or not, and further were between around $1 to $1.5/MMBtu the upstream industry, environmental variable costs (Henry Hub plus 15 per above Henry Hub. NGOs, and the USA’s domestic energy intensive industry. The Obama US LNG first wave projects administration was persuaded that LNG exports were in the national economic Operational/under construction bcma Estimated onstream interest and became more relaxed in Sabine Pass T1 6.1 Mar-16 granting export approval to non-FTA Sabine Pass T2 6.1 Sep-16 (Free Trade Agreement) destinations Sabine Pass T3 6.1 Mar-17 and in streamlining the environmental Sabine Pass T4 6.1 Nov-17 and safety approval process under the auspices of the Federal Energy Sabine Pass T5 6.1 Sep-19 Regulatory Commission (FERC). Freeport T1 6.8 Oct-18 Critical to this decision was evidence Freeport T2 6.8 May-19 provided by consultants establishing Freeport T3 6.8 Jul-19 that US domestic gas prices would Dominion Cove Point 7.9 Jan-18 not rise significantly as a result of LNG export volumes due to the scale of the Cameron T1 5.4 Jan-19 US shale gas resource which could Cameron T2 5.4 Jun-19 be developed at sub $4/MMBtu or Cameron T3 5.4 Jan-20 thereabouts. Corpus Christi T1 6.1 Jan-19 As of early November 2017 three Corpus Christi T2 6.1 Jan-20 project trains are in operation with Elba Island 3.4 Sep-19 a further 12 under construction, Total 90.9 estimated to come onstream over the next 26 months. Total nameplate LNG Source: Energy Media and Industry Sources.

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While such issues are highly pertinent In the period from 2018 to 2025 we will to future US export projects and deal ‘THE SHEER VOLUME OF LNG FROM THE see: structures, the impact of this 91 bcma US PROJECTS, [AND] FROM AUSTRALIA In a low Asian LNG demand tranche of LNG which will flow to AND RUSSIA, HAS RAISED THE PROSPECT scenario: the formation of an LNG global gas markets by 2020 – even at OF AN LNG “GLUT” IN THE PERIOD 2019 glut which will depress both destination market prices as low as TO 2022.’ European Hub and Asian spot LNG Henry Hub plus $1.5/MMBtu – needs prices in order to ‘clear the market’ to be addressed by all global market The ‘next LNG wave’ and the role of US by constraining US LNG exports participants. It represents an increase projects (assuming Russia defends a of 27 per cent over 2015’s global LNG minimum European market share). supply volumes (by 2021, including The sheer volume of LNG from the US This would be followed by a new additions from Australia and projects, shown in the table above, ‘tightening’ of the market, as Asia Russia global LNG supply will be 54 together with that from Australia and ‘pulls’ LNG away from Europe (as it per cent higher than 2015). This is a Russia, has raised the prospect of an did post 2010) with a requirement for huge volume of ‘destination flexible’ LNG ‘glut’ in the period 2019 to 2022. LNG, from projects as yet LNG entering the market at a time To date, this has been ameliorated by: unsanctioned, by 2025 at the latest when major upstream LNG companies (even with substantially higher flows and trading houses are seeking delays and commissioning problems of pipeline gas into Europe from additional supply side optionality to in some of the Australian projects, Russia). This requires FIDs to be grow their LNG trading businesses. higher Chinese LNG demand as a taken on such new LNG projects by LNG buyers, particularly in Asia, are consequence of a policy-driven 2020 at the latest, given the typical seeking alternatives to oil indexation. switch from coal to gas in the five year lead time from FID to Many are over-contracted to the domestic space heating and production start. early to mid-2020s and those which industrial sectors, and are in the market for spot cargoes In a high Asian LNG demand higher gas demand in Europe as a and short-term deals have become scenario: the absence of an LNG consequence of colder winters and accustomed to paying prices lower glut but a tightening of the market coal-to-gas switching in the power than Long Run Marginal Costs (LRMC) due to Asian LNG demand and a sector due to higher coal prices and for the commodity. As a consequence need for LNG, from projects as yet the UK minimum carbon price floor. there is limited appetite to sign up new unsanctioned, by 2023 at the latest. long-term contracts (20 years or so), The main beneficiary of these dynamics This requires FIDs to be taken on new oil indexation is out of favour, and the has been Russia, which has seen its LNG projects by 2018 at the latest. only Asian LNG price reference indices pipeline gas exports to Europe rise from circa 150 bcma in the period 2012 (JKM et al.) have limited liquidity and ‘THE “CRUNCH POINT” FOR NEW LNG IS curve length. The unexpectedly high to 2015, to 170 bcma in 2016, and THEREFORE FAST APPROACHING …’ LNG demand from China over winter potentially to 180 bcma in 2017 (after 2016/17, and anticipated in 2017/18, subtracting volumes exported back to has led to high spreads between Asian Ukraine via the Czech Republic). The ‘crunch point’ for new LNG is spot LNG prices in winter, in contrast to In 2010 we witnessed an LNG supply therefore fast approaching, even if the low spreads during summer months. surge from (mainly) Qatar but also current strong trend of Chinese LNG This underlines: from new projects in Russia, Norway, demand eases over the next year or two. In a Dickensian irony, however, a) The importance of establishing a Peru, and Yemen which initially sought from an LNG sector point of view: recognized Asian LNG price Europe as the market of last resort (with reference with higher forward curve more than adequate import terminal This is the ‘best of times’ in that liquidity for use in medium-term (up capacity) as volumes intended for the there is a cornucopia of gas to five year) contracts. USA were not required due to the shale discoveries available for feedgas into b) The potential value to be captured in gas boom. Over a period of just three LNG projects: in the USA, Qatar such an environment by portfolio years, however, such ‘surplus’ volumes (after the recent lifting of the North players and trading houses in the were absorbed by LNG demand growth Field Moratorium), Russia, East LNG space – namely an incentive to in Asia (particularly as a consequence Africa, Australia, and Canada – not to acquire flexible supply. of the Fukushima disaster). mention Senegal, Mauritania, Papua

24 OXFORD ENERGY FORUM NOVEMBER 2017: ISSUE 111

New Guinea, and the Eastern sign up to an oil-linked price to give you Given that Qatar alone cannot satisfy Mediterranean; that price expectation, you would have the potential LNG requirement in the But at the same time it is the ‘worst to believe that the Asian spot price, the 2020s, the challenge for the ‘Next of times’ in that buyers are European Hub index, Wave’ of US projects is fundamentally disenchanted with oil indexation as a or a new Asian Hub index would whether they can supply the LNG the price benchmark, uncertain of their provide such a price level over the life world may need at a price it is willing own future demand requirements, of your project. If, however, Asian LNG to pay. There is no shortage of LNG and in the case of new LNG demand diminishes rapidly at prices export projects. The table below shows importers, uncertain of the price they much above $8/MMBtu, your project those awaiting FID. All have non-FTA can afford to pay for LNG. will fail to achieve the anticipated approval and around half are awaiting As the fundamentals through time return on capital. FERC approval. increasingly indicate the need for new The incremental demand for gas FIDs, who will ‘step up to the plate’ appears increasingly to come from ‘Next Wave’ potential US LNG export projects to undertake investment in new LNG (mainly Asian) countries whose projects in this environment? Logically it domestic production is either negligible Project/train bcma should be the oil and gas majors who: or insufficient to keep pace with Sabine Pass T6 6.1 demand – but that demand is price have professed a strategic desire to Freeport T4 6.8 shift away from oil into gas in their sensitive. The onus for the upstream Corpus Christi T3 6.1 internal investment capital allocation, players, therefore, given all that has Corpus Christi T4 6.1 have developed an LNG portfolio been stated above, is to focus on Corpus Christi T5 6.1 trading capability and business, low-cost LNG. Of the established LNG players: Magnolia T1 2.7 are able to raise debt cheaper and faster on their balance sheets – Qatar has the advantage of a benign Magnolia T2 2.7 versus the non-recourse financing offshore upstream environment, a Magnolia T3 2.7 route underpinned by a long-term oil track record of delivery, and (in the Magnolia T4 2.7 indexed contract that is required by North Field) a high ratio of co- Lake Charles T1 7.5 independents via banks specializing production of NGLs and condensate Lake Charles T2 7.5 in the energy business. supplementing the LNG economics. Lake Charles T3 7.5 have the confidence to base their East Africa suffers from no liquids LNG FIDs on their assessment of co-production (dry gas) and the Golden Pass T1 7.1 the global gas and LNG market – in potential for schedule slippage and Golden Pass T2 7.1 that they can sell their LNG output on cost overrun due to lack of existing Golden Pass T3 7.1 a mix of medium, short-term, and infrastructure and inexperienced Driftwood T1 7.5 spot transactions over the life of the decision makers. investment – using their trading Driftwood T2 7.5 Australia and Canada are both prone teams to optimize intrinsic and Driftwood T3 7.5 to cost overruns due to high-cost extrinsic value as market conditions Driftwood T4 7.5 (scarce) skilled labour and, in the change. case of Canada, complications Driftwood T5 7.5 To succeed in the next LNG wave relating to pipeline approvals by Calcasieu T1 7.1 requires not only the skills and First Nations and unresolved and Calcasieu T2 7.1 confidence outlined above but, overlapping regulatory/fiscal Total 137.3 fundamentally, projects which have jurisdictions. an underlying low cost base given the Source: Energy Media and Industry Sources. constraint of affordability – namely ‘… THE CHALLENGE FOR THE the elasticity of demand versus price. Bluntly, in the next LNG wave you could ‘NEXT WAVE’ OF US PROJECTS IS The fundamental challenge faced invest in an Australian greenfield project FUNDAMENTALLY WHETHER THEY CAN by these projects is simply the fully requiring a market price of $12/MMBtu SUPPLY THE LNG THE WORLD MAY NEED built-up cost of delivery to destination to achieve your target rate of return. AT A PRICE IT IS WILLING TO PAY.’ markets versus what those markets are But, in the absence of buyers willing to willing to, or can, pay.

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On a benign list of assumptions, the table delivered to markets) the market price liquefaction trains in a long-term below indicates how this could run. received would reflect only that which partnership with Bechtel, reducing is affordable. the critical liquefaction cost Components of fully built-up cost component. of delivery to destination markets New models for US LNG exports The open question is why the major $/MMBtu oil/gas/LNG portfolio players have, Tellurian have proposed a model for Henry Hub price 3.00 to date, left such innovations to the their Driftwood LNG project (featured former US regas incumbents or (in the Liquefaction energy 0.30 in the table 2 on the previous page) case of Tellurian) to entrepreneurial Liquefaction tolling fee 2.00 which sidesteps Henry Hub as the operators expounding new business Shipping (to Asia) 2.00 basis price of liquefaction feedgas. In models? One response could be Total 7.30 their model, international LNG buyers/ that the oil and gas majors have portfolio players are invited to invest in been superficially keen to emphasize an integrated supply chain (upstream gas, but slow to assimilate the LNG In terms of delivered cost, this is shale gas play, pipeline transportation, portfolio rationale and logic into their already in the ‘danger zone’ above and liquefaction) which would deliver investment decision making. In many $6/MMBtu, espoused by Jonathan LNG on board a ship in the US Gulf cases, the oil and gas majors will, in Stern in his recent paper ‘Challenges at a cheaper cost than conventional effect, subsidize the higher cost of to the future of gas: unburnable or projects. The sources of savings are capital of LNG export facility incumbent unaffordable?’ (OIES Paper, December two-fold: owners, as a consequence of their 2017) and the IEA in the 2017 ‘World failure to make earlier, bolder moves. The claimed ability to explore for, Energy Outlook’ as being above the Future rationalization is possible, but level developing countries can afford produce, and deliver gas to the probably only once the LNG market to pay. It would therefore be subject to liquefaction plant at below Henry Hub fundamentals are more certain (in demand–price elasticity or (more likely, prices; and, terms of timing) and US cost of supply once capital cost are sunk and LNG By standardizing (‘cookie cutting’) versus apparent affordability is clearer.

US shale productivity gains: can they be sustained? Trisha Curtis

Production growth from horizontal Can these productivity gains be But – geologically and technologically shale oil and gas wells has sustained? The short answer is yes. speaking – there is certainly room continued year over year throughout Drilling, completing, and producing to grow. the course of the oil price downturn. shale or tight oil and gas wells has It is quite apparent, based upon The figure opposite shows oil/liquid always been both an art and a science. our conversations with a number of output for all US horizontal wells Over the past three years, in a sub-$60 technical experts and engineers, that each year, from 2012 through 2017. oil price environment, this has never there are many ‘known unknowns’ Every year has seen an uplift in been more true. A combination of regarding sub-surface science and both initial production (IP) as well as science, technological advancement, that the industry is actively trying to outer month production, resulting in and brute force experimentation has unlock these. Well productivity can substantially increased oil output led to broad productivity gains across and will continue to improve as these per well. the shale patch and will continue to enigmas are solved. Furthermore, the do so going forward. In the long run, short-cycle nature of the shale industry ‘A COMBINATION OF SCIENCE, the shale industry will continue to begets massive amounts of data and TECHNOLOGICAL ADVANCEMENT, AND improve well productivity, but in the the unique opportunity to test multiple BRUTE FORCE EXPERIMENTATION HAS short run, economic constraints could well design iterations in a production LED TO BROAD PRODUCTIVITY GAINS …’ imperil productivity gains as operator environment across a relatively short profitability faces renewed scrutiny. timeframe. It is arguably the latter that

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three column NOVEMBER 2017: ISSUE 111 US horizontal well decline curve – liquids/oil Sources: Petronerds; DrillingInfo Data.

500 2012 2013 2014 2015 2016 2017 450 400 350 300

b/d 250 200 150 100 50 - 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 Month US horizontal well decline curve – liquids/oil Sources: PetroNerds; DrillingInfo Data. is primarily responsible for the advent One of the largest factors contributing of ‘high-intensity’ completions and the to increased well productivity is a ‘A COMPLETE UNDERSTANDING OF EVENTS associated productivity gains. relatively simple completion design HAPPENING DOWNHOLE – COMPLETIONS change. In the past few years, AND THE FRACTURE NETWORK RESPONSE emphasis has been placed on pumping Primary factors behind productivity growth – REMAINS ELUSIVE.’ increasingly larger volumes of proppant Shale activity at $100/b was (sand) and fluid (water) at faster understanding of events happening characterized by the rapid pace at rates (higher pressures) downhole. downhole – completions and the which companies brought new wells The relationship between increased fracture network response – remains online to increase overall corporate proppant and additional productivity is elusive. production volumes and delineate or largely accepted, even if the specific hold new acreage. Efficiency and factors behind the relationship are less The shale sector has been through long-term well productivity were a well understood. This is among the many iterations of completion design secondary concern. Now, several years most discernible factors contributing to changes over several years, with into a hunt for further efficiencies and, recent productivity gains, but it is hardly varying types of downhole tools (‘plug ultimately, profitability, the industry’s the only one. and perf’ versus ‘sliding sleeves’), activity can be characterized by a proppant, and fluid coming in and out Operators have gained years of of favour. The ability to experiment and mix of innovation, determination, and experience working through their move completions designs in tandem desperation. Innovation remains a geology, enabling millions of acres with oil prices and service costs key stepping stone to profitability. across several shale plays to be de- helped many operators to forgo exotic The industry’s leading operators risked, and generating massive data completion designs and components, frequently echo the same sentiment sets to draw upon. The experience in favour of simple but effective high- about technological advancement in gained from the tens of thousands of intensity completions. In combination, earnings calls, that is: ‘we are still in shale wells that have been drilled in these factors have positively impacted the early innings’. Some would argue recent years has dramatically improved rising oil output per well. that more advances have been made reservoir knowledge and, with it, the in truly understanding the horizontal ability to better apply the ever-evolving In tandem with the evolution of more development of unconventional technology. To put it simply, operators, precise geosteering and reservoir reservoirs over the last two years than in cooperation with service companies, targeting, larger completion jobs in the past decade (EOG Resources are better able to identify the best pay have been a standout factor in well Q2 Earning, Seeking Alpha). As zones and land laterals more precisely performance gains. The terminology operators have been forced to curb within them. And they are doing this for applying larger completion jobs, costs, they have also been forced to more quickly than ever before, thus or increasing the quantity of proppant put more thought into each well. reducing drilling costs. Still, a complete and fluid per foot, has become a bit

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hyperbolic and perhaps panders to slickwater as a fluid, and increasing often copy their completion moves the investor community. ‘High intensity proppant loading per lateral foot – in without necessarily applying the front- completions’, ‘upsized completions’, their last earnings call. ‘Centennial’s end rock science. While such ‘copycat’ ‘enhanced completions’, ‘version 3.0 technical team is focused on the wells are not necessarily 100 per cent completion’, ‘generation x frac’, and continuous evolution of our completion optimal, the end result – increased ‘high density fracs’, have all entered design. All wells completed during productivity – more or less transfers the E&P vernacular to describe the the quarter, had 15 clusters per stage, over. Better drilling and completions changing completion matrix over the 100% slick water, an average greater designs are leading to productivity past three years. These operators are than 2,300 pounds of profit per lateral gains across the board. Pump two all referring to essentially the same foot. This represents a significant or three times as much sand down thing: massively increased quantities design change from wells completed in the well as you did in 2014 (using of proppant (namely sand), massively the previous quarters’ (Q2 Centennial, slickwater instead of a gel or hybrid increased quantities of fluid (mainly Seeking Alpha). fluid), layer in a better understanding of slickwater), and the placement of more your reservoir, increase the horsepower fractures along the wellbore through ‘THE BASIC LOGIC IS SIMPLE: and rate you are pumping, and add tighter cluster spacing of perforations. CRACK MORE ROCK, EXTRACT MORE more perforations per stage along your The industry disagrees on what exactly lateral – then boom, you often end up HYDROCARBONS.’ is happening downhole once all this with a better well than you did in years water and sand is applied, but they past. And of course, extend the length agree that larger completions jobs are In our paper ‘Unravelling the US shale of your lateral, where you can. working to increase the amount of oil productivity gains’ (Trisha Curtis, OIES and gas output per well. Paper WPM 69, November 2016), we A note on lateral lengths discussed the notable changes in The average lateral length of a shale Operators continue to tweak methods approaches to drilling and completions, such as rock quality assessments, the or tight oil well has, for the most part, In their last conference call (Q2 2017), importance of geosteering in keeping increased year on year. All things EOG Resources discussed their laterals in the highest quality rock, and being equal, increasing lateral length geosteering technology and rock optimizing the placement of fracs along will increase well productivity, as it quality, reiterating the importance of the lateral. High intensity completions exposes a well to additional pay zone. these for well performance. They also and well spacing were also discussed. It is certain that the productivity curves discussed smaller changes – such A year later, the mantra has not changed shown in the previous section have as drill bit designs and mud motors – dramatically. While each operator tends benefited from longer lateral lengths having a positive impact on cost and to focus on their strengths relative to (but by far more in some oil plays than productivity: ‘taking advantage of our those of their peers, geosteering, lateral in others – Bakken wells have averaged new steering technology that we kind of placement, rock quality, completion two miles in length for years). The figure developed to identify the best rock and advances, frac optimization, and opposite above shows the average then steer the well in the best 10 or 20 proppant loadings are all commonalties lateral length for active Permian Basin feet of that rock. As we mentioned in when operators talk about productivity horizontal wells by year. all these plays, the rock quality makes advances. Some operators are making The average Permian Basin horizontal a huge difference in the productivity of serious attempts to understand the how well lateral length grew from 5,500 each play … we are just offsetting the and the why behind these factors, but feet in 2013 to 6,800 feet in 2016, cost inflation with improved technology many are simply following the leads of but average lateral lengths have not and the design of bits, design of their peers and applying similar increased through the first half of 2017. motors. We have our engineers doing methods to their own geology without However, increasingly long laterals both of those. We’ve got our own mud necessarily performing the research on are only part of the productivity systems and mud engineers’ (Q2 EOG, the front end. Regardless, the basic story. The figure opposite below Seeking Alpha). logic is simple: crack more rock, extract shows productivity for Permian Basin more hydrocarbons. Centennial Resources discussed horizontal wells by year, isolated by their completion design ‘evolution’ – It does not take billions of dollars and lateral length segments. Within each increasing the amount of perforation a rock lab to identify better lateral 1,000 foot segment, productivity has clusters per stage, use of only placement. EOG Resources’ peers grown each year. This tells us that

28 OXFORD ENERGY FORUM two columns 2017 sample is partial-year data. Sources: DrillingInfo Data, PetroNerds calculations (for wells with known lateral data). NOVEMBER 2017: ISSUE 111

Average of Lateral Length flow. This summer, an article in theWall 7,000 Street Journal aptly captured the 6,000 dilemma with the title ‘Shale Produces 5,000 Oil, Why Not Cash’. Later this summer, 4,000

feet BHP Billiton agreed to step out of US 3,000 shale entirely, due to activist pressure 2,000 (‘BHP bows to activist pressure to exit 1,000 US shale’, Jamie Smyth, Hudson 0 2013 2014 2015 2016 2017 Lockett, and Pan Kwan Yuk, 21 August 2017, Financial Times). Average Permian Basin lateral lengths by year 2017 sample is partial-year data. Sources: DrillingInfo Data, PetroNerds calculations (for wells with known lateral data). ‘WHILE FREE CASH FLOW IS STILL IN THE RED, MANY OPERATORS ARE TURNING THE CORNER …’ productivity is growing independently of to look for profits from these publicly lateral length expansion. traded operators, with the spotlight being on balance sheet stabilization, Clearly, investor sentiment is changing, Investor scrutiny could impact gains in the capital discipline, and ultimately free but this does not mean that the story of short term cash flow. How strong this investor US shale has been told. Technologically sentiment is and will be over the next speaking, this industry has room to Productivity gains have been made couple of quarters is not yet known. In grow. The industry is tackling numerous possible by operators’ ability to spend 2015, the activist investor David scientific known unknowns, all of which capital, despite a sector that continues Einhorn singled out Pioneer Natural can contribute to greater productivity to burn billions of dollars in cash each Resources as a ‘mother-fracker’, and efficiency. Different types of year. Capital is needed for everything basically asserting that the industry was investors will view operators differently from acreage acquisitions to sand a Ponzi scheme and that Texans were for several reasons. Some investors purchases. However, as investors begin ‘all hat and no cattle’. Pioneer’s stock may prioritize free cash flow more than to focus more on free cash flow and on was impacted, but rebounded and has production growth. Others may seek profitability,2017 sample capital isexpenditures, partial-year anddata. Note: Well productivity indexed to a sincebase beencurve, far which more equalsimpacted 1. by recent expansion of asset bases and look for in turn production growth, could face Source: DrillingInfo Data, PetroNerdsdiscussions calculations around (for wells their with gas-to-oil known ratio lateral executiondata). by operators. But in the near headwinds. (GOR). But lately, more analysts have term, operators may have to restrain There is a growing sense that the tide is come out of the woodwork to discuss spending, even if that means less finally turning; investors are now beginning operator performance and free cash sand. Analysts and operators should

2.5 2013 2014 2015 2016 2017 2

1.5

1 productivity factor productivity 0.5

0 4k-5k Ft 5k-6k Ft 6k-7k Ft 7k-8k Ft 8k-9k Ft 9k-10k Ft Laterals Laterals Laterals Laterals Laterals Laterals

Permian Basin horizontal well productivity by lateral length segment 2017 sample is partial-year data. Note: Well productivity indexed to a base curve, which equals 1. Source: DrillingInfo Data, PetroNerds calculations (for wells with known lateral data).

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appreciate the fact that investors in the red, many operators are turning to survive renewed investor scrutiny do not always know E&Ps and their the corner; they are doing so around over the coming quarters. The activity as intimately as they should. $50 WTI. The operators that can rein in implications for the industry of such These operators should be viewed as spending, maintain production levels, investor scrutiny are meaningful and individuals and not lumped together and show how they will get to free cash could propel assets to change hands as a whole. While free cash flow is still flow neutrality may well be able over the course of 2018.

US crude exports: gaining ground Dominic Haywood

Introduction sustained basis in the near term. It is Sufficient infrastructure must exist expected that exports will average to allow shale production growth to US crude oil exports surged to a record 1.7 mb/d in 2018, with much of the y/y move from the wellhead to domestic high of 1.8 million barrels per day export growth occurring in the first half trading hubs and then from these (mb/d) in October 2017, 1.2 mb/d of 2018 – primarily due to a low base. trading hubs to export terminals. higher y/y. A few months earlier, the But in the second half of 2018, export market had fervently questioned the International markets need to volumes should also remain robust, in ability of the USA to export more than become comfortable with the quality line with a weak forward WTI–Brent strip 1.2 mb/d, suggesting capacity of US crude oil. Well-known grades that currently averages –$5.85 per constraints would cap departures at such as Mars and WTI-Midland are barrel for 2018, which is enough to this level and result in large inventory known entities, but tank blends like open the export arbitrage window from builds on the US Gulf Coast. The Domestic Sweet (DSW) are still the Gulf Coast. viability of export arbitrage, given the largely internationally untested and prevailing economics at the time, have so far received a poor reception together with the international market’s Factors affecting US crude exports in international markets. appetite for ‘low quality’ US oil, also When combined, the above factors Achieving these volumes is, however, came under scrutiny. But the reality on should manifest themselves in the dependent on several factors. the ground was different, as physical spreads between WTI and US cash players re-affirmed their belief in the US production growth must be differentials and between US crude adequacy of US dock capacity, and the sufficient to allow for both an prices and international ones. combination of wide WTI–Brent increase in refinery demand in spreads and strong cash differentials in 2018 and incremental export US production growth Asia and the North Sea lubricated the demand. If US production growth Forecasting US crude oil production gears of arbitrage. Indeed, at the end falters on either lower crude oil has been a rollercoaster ride over of October, US exports topped 2 mb/d, prices or on a shift towards the past 18 months. The market has exceeding even the most bullish of disciplined growth from shale moved from calling time on shale expectations, as the combination of producers, then export volumes will production in mid-2016 to calling for high export demand and backed-up be constricted. astronomical growth rates in 2017. cargoes following Hurricane Harvey There will need to be a sufficient Consensus estimates for US crude buoyed departures. Despite the supply deficit inglobal balances production growth today are between October furore, the USA is unlikely to for shale production growth to fill. 0.7 and 1 mb/d y/y for 2018. Assuming export 2 mb/d of crude oil on a If global demand falters in 2018 or production growth of 0.7 mb/d and supplies surprise to the upside 0.21 mb/d of refinery runs growth next ‘IT IS EXPECTED THAT EXPORTS WILL (either through higher availability of year and 0.1 mb/d of synthetic crude AVERAGE 1.7 MB/D IN 2018, WITH MUCH OPEC crude or a recovery in exports from Canada, the USA will OF THE Y/Y EXPORT GROWTH OCCURRING non-OPEC production) then shale have at least 0.59 mb/d of incremental IN THE FIRST HALF OF 2018.’ exporters will find themselves in a crude oil length to dispose of. In a difficult predicament. backwardated market, there will be

30 OXFORD ENERGY FORUM NOVEMBER 2017: ISSUE 111

little incentive for traders to store this the relentless onslaught of US exports exist at a lower level of around 2.5 mb/d material. This means exports are likely expected in 2018. This leaves Asia Pacific based on current infrastructure. But it is to be the only option to dispose of this as a key destination market for US crude, not the size of the docks that limits their length. It also means the volume of oil particularly as promising demand has ability to export. Instead, it is the exported is directly linked to the volume already emerged from the region. tankage at the dock that must unload of oil supplied to US refiners, minus the oil into a ship and the pipelines that Importantly, this Asian demand for US volume that they run. feed those tanks that must refill them crude is not limited to spot purchases quickly to ensure a steady rate of dictated by arbitrage economics. There loadings. Many of these tanks and ‘WHAT IS MORE DIFFICULT TO PREDICT AT are already pseudo term arrangements pipelines are already used to supply THIS STAGE IS WHERE EXACTLY THE NEW with Asian parties holding equity in US domestic refineries, either by delivering CUSTOMERS FOR US OIL WILL BE.’ upstream projects, politically motivated domestic oil to them or by piping purchases made on governmental imported sour crude. Looking further mandates, and deliberate ahead, the pipeline infrastructure from US crude exports: where to? diversification by Asian buyers keen the wellhead to the export terminal Recent volatility in ICE Brent spreads to move away from reliance on OPEC has offered an early insight into the and Middle East crudes. These flows must be sufficient to move production possible clearing mechanism for will likely develop over time and ensure growth to the water. Atlantic basin markets in the face of a baseload of demand for US crude In order to ensure that this process high US crude exports. These spreads in the East. But new markets will also can occur, a wave of new midstream moved from a strong backwardation of need to emerge to absorb the export investments has been made over the some 45 cents per barrel down to growth that is expected to materialize. last six months. Some 1.1 mb/d of new 15 cents per barrel, as US cargoes A key market here may be Latin pipeline projects between mid-2017 began to arrive in Europe and as they America, where dwindling domestic and end-2019 have been tracked that pushed out North Sea crudes from production is leaving refineries short of aim to transport oil from the Permian Asia. Similarly, WAF crudes have crude. The proximity of these plants to basin to the Gulf Coast. struggled to clear, and these US production, and their less complex differentials have moved lower on a refineries, means the region could be A final important infrastructure sustained basis as they attempt to a willing buyer of more US oil over constraint is the competition that crude price at competitive levels relative to US the next 12 months. Similarly, there is exporters face at the docks from crudes. Short-term fluctuations aside, scope to develop US markets more. product exporters. As the Gulf Coast and assuming that global liquids The US East Coast (USEC) still relies refining fleet increasingly gears up to balances will draw by 0.2 mb/d, US on almost 1 mb/d of crude oil imported export more refined product overseas, exporters will continue to find steady from the Atlantic basin; if Jones Act demand for berthing and lightering will demand for their products over the rates fall, making the arbitrage viable, rise exponentially. This means crude course of 2018. However, what is more then there is certainly potential for more export schedulers will be forced to jostle difficult to predict at this stage is where Permian oil to supply these refineries. with refined products shippers to secure exactly the new customers for US oil space on the dock for their exports. will be. So far this year, US crude Infrastructure exports have been largely split between A popular angle of analysis around US US crude quality Asia Pacific (36 per cent or 0.34 mb/d), export infrastructure focuses on dock In the early days of crude exports, Canada (32 per cent or 0.31 mb/d), capacity. While this is an important US barrels got a bad rap overseas and Europe (17 per cent or 0.17 mb/d). consideration, it is certainly not the as foreign refiners complained about However, Canada is likely already most important potential infrastructure high metals content, variable refining nearing saturation as it has already constraint when it comes to US export yield, and unstable quality. These are backed-out large volumes of US crude capacity. Summing the record daily issues that US refiners have plenty of this year. Europe may be able to loads for all ports in the USA on any experience with as blenders accommodate further US barrels by given day shows that more than 3.2 increasingly saw attractive margins by sending more North Sea oil towards the mb/d of export capacity could exist combing heavy sour high TAN East, but given the fragile pricing in the under perfect operating conditions. Canadian crude with Rockies region today, it is unclear how well Clearly this is a theoretical maximum condensates and Bakken light sweet to North Sea markets will hold up under and in practice, constraints would likely create a tank blend known as Domestic

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Sweet (DSW). With DSW increasingly line with the global rebalancing, shunned by US refiners, some players ‘THE SIGNALS ARE BEING SENT TO BOTH post-OPEC cuts. attempted to export it into international US PRODUCERS AND US EXPORTERS Forward futures curves have moved markets as WTI. However, would-be THAT THE WORLD WILL NEED THEIR OIL.’ into backwardation, signalling that importers of US crude have become the market will require oil from wise to DSW and now specify the storage to meet demand. grades they are willing to accept in their destinations each month, as arbitrage Foreign customers have proved tenders. Indeed, various Asian and economics shift and the oil market impressively receptive to US shale Latin American refiners specifically gyrates within seasonal patterns. crudes, despite the high light-ends tender for field grades such as But, the corollary of US production content often associated with these WTI-Midland, Bakken, or Eagle Ford growth is US exports: one cannot exist barrels. and these barrels have proved popular without the other. And, the signals are Shale producers are being given the in overseas markets. being sent to both US producers and green light to produce: their equity is US exporters that the world will need rallying from the August lows, Variability is the name of the game their oil. appetite for their debt is healthy, the Importantly, there will be a high level of Flat prices have moved sharply market is backwardated, and flat variability in both export volumes and higher over the last few months, in prices are higher.

The outlook for biofuels in the USA Scott H. Irwin

Production and use of biofuels in to almost continuous legal challenge. The difference between the ‘total the USA during the last decade Crude oil prices have also crashed; advanced’ mandate and the total of has grown very rapidly due to a starting in the second half of 2014 the cellulosic and biodiesel mandate combination of factors, two of which they plunged to inflation-adjusted levels is referred to as the ‘undifferentiated stand out: not seen since the 1990s. The purpose advanced’ mandate and can be of this article is to assess the outlook satisfied by a combination of qualified a) the large increase in real crude oil for biofuels in the USA for the next five advanced biofuels. ‘Conventional prices, years in light of these changes. biofuels’ are generally assumed to be b) implementation of the Renewable corn-based ethanol but this is actually Fuel Standard (RFS). The Renewable Fuel Standard not explicitly required by the RFS legislation. Instead, corn-based ethanol Since the RFS is central to the outlook has been the cheapest alternative ‘THE INCREASE IN CRUDE OIL PRICES IS for biofuels, it is important to start with for this category that also meets the CRUCIAL AS IT MADE BIOFUELS MORE some background on the standards. environmental requirements of the RFS. COMPETITIVE IN THE MARKETPLACE …’ The 2007 statute for the RFS required The ‘conventional biofuels’ mandate is the US Environmental Protection referred to as the ‘conventional ethanol’ Agency (EPA) to establish volume mandate for the remainder of this The increase in crude oil prices is requirements for four categories of article in order to be consistent with the crucial as it made biofuels more biofuels for each year from 2008 most common term for this particular competitive in the marketplace and through 2022: RFS mandate. led to a political reaction that powered the RFS legislation through the cellulosic biofuel, The figure opposite shows the statutory US Congress. Much has changed biomass-based diesel, RFS volume standards from the 2007 since the heady days of 2005–7 for legislation. The basic logic behind the total advanced biofuel (which biofuels. The RFS mandates have standards was to rely almost entirely on includes biomass-based diesel), been extremely controversial in some ‘first generation’ conventional ethanol quarters, particularly the petroleum renewable fuel (referred to as in the early years and then transition to refining sector, and have been subject ‘conventional ethanol’ here). greater reliance on ‘second generation’

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40 Cellulosic Biodiesel Undifferentiated Conventional 35 30 min. 20% GHG 25 reduction 20 15 min. 50%

gallons (billion) 10 GHG reduction 5 0

Statutory US renewable fuels standards 2008–22 Source: ‘Overview for Renewable Fuel Standard’, Renewable Fuel Standard Program, US Environmental Protection Agency. https://www.epa.gov/renewable-fuel-standard-program/overview-renewable-fuel-standard advanced cellulosic ethanol. This caused the EPA to use its RFS waiver gasoline consumption. At the time is seen in the cap on conventional authority to write down the cellulosic the RFS was passed in 2007, it was ethanol at 15 billion gallons starting in mandate to very low levels relative to commonly projected that US gasoline 2015 and the increase in cellulosic from statutory levels each year to date. The consumption by 2015 would be 150 3 billion gallons in 2015 to 16 billion total advanced biofuel mandate has billion gallons. So, it is no surprise gallons in 2022. The total RFS mandate also been written down in conjunction that the cap on the conventional for biofuels maxes out in 2022 at 36 with the write down in the cellulosic ethanol mandate in 2015 was set to billion gallons. Note that the biodiesel mandate. 15 billion gallons, exactly 10 per cent of projected gasoline consumption. mandate was established as a There is little reason to be optimistic The problem is that actual gasoline minimum of one billion gallons per year about the prospects for cellulosic consumption began falling almost as from 2012 through 2022, with larger biofuel production through 2022. One soon as the RFS was passed, due to amounts subject to EPA approval. of the most high-profile cellulosic the combined effects of high real crude ethanol plants developed by DuPont in oil prices and the onset of the Great Nevada, Iowa was recently shut down ‘THE MANDATED TARGETS FOR Recession. This meant that by 2013, and no new plants are scheduled to CELLULOSIC BIOFUELS WERE VERY the conventional ethanol mandate as begin construction. Some progress AGGRESSIVE FROM THE OUTSET …’ specified in the RFS statute began to is reported in the ethanol industry surpass the E10 blend wall. for using the non-starch parts of the Issue #1: cellulosic ethanol corn kernel for cellulosic production at Understanding what happens when existing plants, but it is difficult to see the conventional ethanol mandate The mandated targets for cellulosic anything but very marginal growth in exceeds the E10 blend wall requires biofuels were very aggressive from cellulosic production moving forward. some understanding about how the outset, given that industrial-scale compliance under the RFS works. production was virtually non-existent at Obligated parties under the RFS are Issue #2: blend wall the time the RFS was passed in 2007. refiners and importers of gasoline While several plants have been built The E10 blend wall is the main and diesel. On an annual basis, the in the last decade, cellulosic ethanol reason that the RFS has become EPA issues rulemakings about the production has struggled to reach so contentious in recent years. This volume of biofuels that each party a few million gallons. The vast bulk issue arose because regulation in must demonstrate is blended into of what has been produced in this the USA has traditionally limited the final over-the-road transportation fuel category is actually captured landfill ethanol content of gasoline blends for that calendar year. Compliance gas in liquid form, which qualifies as a to a maximum of 10 per cent by is demonstrated by turning into the cellulosic biofuel due to the breakdown volume. Consequently, the theoretical EPA tradeable credits known as the of paper lignin in landfills. The low maximum amount of ethanol that can Renewable Identification Numbers, or production totals from all sources has be consumed is 10 per cent of total RINs for short. The RINs are created

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when a biofuel is produced and travel Much like the trench warfare of World modification of the statutory volumes or with the fuel as it moves through the War I, the last four years have seen an outright repeal of the RFS. But the supply chain. Obligated parties can ebbing and flowing of which side had countervailing political power of petroleum obtain RINs by blending biofuels the upper hand in the political battle refiners is sufficient to prevent the RFS themselves or buying the credits from over the RFS. For example, the Obama mandate volumes from being set much non-obligated parties. Administration EPA cut the conventional above the minimums specified in the ethanol mandate in 2014–16 by a total statute. This interpretation is the basis The price of RINs exploded in early of 2.24 billion gallons under pressure for the projections of RFS volumes over 2013 as the conventional ethanol 2018–22 found in the figure below. The mandate exceeded the E10 blend wall from refiners. The EPA’s authority to projections assume that: for the first time. In a matter of months, make these cuts was immediately the price of ethanol RINs went from a challenged by biofuel and agricultural i) the conventional ethanol mandate few cents to nearly $1.50 per gallon. groups, and last July a US Federal will continue to be set at the statutory While there have been many charges Appeals Court ruled against the EPA. maximum of 15 billion gallons, of manipulation, or the generic epithet Most recently, the Trump Administration ii) the advanced mandate will be set of ‘speculation’, to explain the price EPA signalled, in a September 2017 at the minimum level in the statutes, explosion, there is actually a simple notice of rulemaking, that it was which is 4–5 billion gallons, considering several other measures for explanation. The RFS contains a iii) the biomass-based diesel mandate reducing the RFS mandates. After a safety-valve ‘nesting’ feature whereby will be set at a constant 2.1 billion firestorm of protest from biofuel and advanced biofuel RINs, principally gallons, biodiesel, can be used to not only agricultural groups, the EPA director iv) the cellulosic mandate will remain meet the biodiesel and advanced subsequently took the unusual step of below 300 million gallons. mandates but also the conventional issuing a letter disavowing any of these ethanol mandate if need be. So, when new measures. The net result is that the total RFS biofuels the ethanol mandate began to exceed mandate increases only marginally from 19 billion gallons in 2018 to 20 billion the blend wall the gap between the two ‘[AN INTERPRETATION OF] THE had to be filled by something besides gallons in 2022. If anything, these POLITICAL WARFARE OVER THE RFS AND blended (corn-based) ethanol, and that projections lean toward the conservative THE BLEND WALL IS THAT IT HAS something was biodiesel. In essence, side, with some possibility that the biodiesel became the marginal gallon REACHED A STALEMATE.’ volumes will be slightly higher due to for filling the conventional ethanol intense lobbying by biofuels and mandate and ethanol RINs began agricultural groups. A reasonable interpretation of the events closely tracking the much, much more surrounding the political warfare over expensive price of biodiesel RINs. Issue #3: point of obligation the RFS and the blend wall is that it has At this point, the equivalent of political reached a stalemate. The political power The debate about point of obligation – trench warfare broke out between of biofuelSource: and Author’s agricultural own groups, calculations. for the RFS is really an extension petroleum refiners and biofuel particularly in the US Senate, prevents of the debate surrounding the E10 producers. On one side, refiners and their political allies argued that the ‘RFS was broken’ and that the 20 Cellulosic Biodiesel Undifferentiated Conventional dramatic increase in RINs prices was 18 substantially harming their operating 16 profits. On the other side, biofuels and 14 agricultural groups argued that the 12 RFS was intended by Congress to be 10 8 a technology-forcing programme and gallons (billion) 6 that the high RINs costs reflected the 4 unwillingness of the petroleum refining 2 industry to make the investments that 0 would lower the cost of breaching the 2018 2019 2020 2021 2022 blend wall via higher ethanol blends Expected implementation of the US renewable fuels standards, 2018–22 such as E15 and E85. Source: Author’s own calculations.

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blend wall. As noted in the previous there is some evidence that blenders section, petroleum refiners argue that in parts of the USA actually gain at ‘A POLITICAL STALEMATE OVER THE RFS high RINs costs negatively impact the expense of gasoline and diesel HAS DEVELOPED THAT FAVOURS A their operating margins. One widely consumers in the RINs pass-through “STEADY STATE” OUTLOOK …’ discussed proposal is to simply move process, but this does not affect the the point of obligation upstream from impact on refiners. upstream. So, it is no surprise that the refiners to blenders of biofuels, thereby 2 Logistics and administrative costs EPA has signalled that the point of doing away with the RINs obligation for the RFS. obligation is not going to be changed. at the refining level. This solution does From a conceptual standpoint, it Since smaller ‘merchant’ refiners may have a certain logic, since the RFS is would make sense to place the point have less ability to pass through RINs after all a blending mandate. But the of obligation for a biofuels blending expenses, it may be necessary to proposal also ignores two important mandate at the point in the supply increase the number of RFS considerations regarding the operation chain where biofuels are blended with exemptions for small refineries. of the RFS. petroleum fuels. However, there are 1 Are refiners are actually harmed literally tens of thousands of blenders Summary in the supply chain, ranging from by high RINs costs as claimed? Biofuels consumption in the USA is large integrated energy companies The answer comes down to the primarily driven by what happens to the with thousands of retail stations to degree that refiners can pass RFS. A political stalemate over the RFS through the RINs costs in the form of smaller independent firms with a few has developed that favours a ‘steady higher prices for the gasoline and stations. Moving the point of state’ outlook for the consumption of diesel blendstock they sell to obligation to the blending level would biofuels over the next five years. While upstream blenders. In industry therefore entail a huge increase in the this limits downside risk to US biofuel parlance, the RINs costs are said to cost of administering the RFS producers, it means that they will have show up in the ‘crack spread’. The mandates compared to the current to look to international markets for available empirical evidence system of obligating a few dozen significant growth opportunities. One suggests that refiners are able to refining firms. exception may be domestic biodiesel quickly pass the RINs costs on to The bottom line is that the evidence production, which could increase wholesale blenders through higher indicates that refiners as a group are substantially if countervailing duties blendstock prices. Outside of the not being financially harmed by RINs are imposed on imports from some administrative costs incurred, refiners expenses and it would be very countries and/or the biodiesel tax then should not be harmed financially expensive and impractical to move credit is changed from a blender to by their RFS obligations. Interestingly, the point of obligation further a producer credit.

Can the US coal industry come back? David Schlissel

The coal industry in the USA has been heels of the cancellation of more than slide. Five large coal companies went in a sharp decline over the past decade. 150 proposed new coal plants. bankrupt in 2015 and 2016. A sixth Coal-fired generation fell by over 745 company recently filed for bankruptcy. The steep decline in coal-fired million megawatt hours (MWh), or 38 per generation has led to a similar fall Donald Trump campaigned for cent, between 2008 and 2016, causing president boasting that he would bring its share of the US electricity generation in coal production, from 1.17 billion back US coal, making it ‘great’ again mix to plummet from nearly 50 per cent tons mined in 2008 to 728 million tons while creating more mining jobs. His in 2008 to slightly over 30 per cent in mined in 2016, a 38 per cent drop. US administration has taken a number of 2016. Over 100 gigawatts (GW) of coal- coal exports declined by 26 per cent. actions to bring this boast to life. fired generating capacity, representing As a result, coal mines have closed more than 250 plants, has been retired and the number of coal mining jobs To date, however, Trump Administration since just 2010. This follows on the has continued its long-term efforts have not had any significant

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The only real hope for reviving the coal transition.’ According to Ethan Zinder, ‘TO DATE, HOWEVER, TRUMP industry is for the price of natural gas – head of the Americas at BNEF ‘We ADMINISTRATION EFFORTS HAVE NOT coal’s major competitor – to spike, and to don’t foresee any major comeback for HAD ANY SIGNIFICANT SUCCESS IN remain very high for long periods of time. coal anytime soon’ in the USA. ‘That’s BRINGING BACK COAL.’ That said, one of the Trump going to be a difficult transition for a Administration’s stated energy policy lot of folks … but this is a transition, goals – in addition to making coal great this is a modern economy, and this is success in bringing back coal. An initial again – is to expand the production of displacement, and this is reality’ wave of optimism did occur in the natural gas. If that is achieved, it would (SNL, 8 February 2017). industry as coal-fired plants generated prevent sharp gas price spikes, possibly about 5 per cent more power in the first It is also clear that the coal industry push natural gas and energy market half of this year than in the first six itself lacks full confidence in Trump’s prices even lower than they are now, and months of 2016. However, more recent promises. Despite the actions that the further decrease generation at coal-fired data from the US Department of Energy new administration has taken to help plants. This, in turn, would make coal show that year-to-date coal generation coal, an additional 19 GW of coal plant plants even more uneconomical, through August of 2017 was a mere retirements have been announced probably placing a stake through the 0.4 per cent higher than it had been or included in new utility resource heart of coal, as nothing could be more during the first eight months of 2016. plans just since the beginning of this harmful to the industry. This doesn’t offer much cause for year, with 15 GW of these retirements optimism that coal is in a substantial scheduled to be completed by the end ‘THE ONLY REAL HOPE FOR REVIVING long-term recovery. of 2020. THE COAL INDUSTRY IS FOR THE PRICE Is it possible, nevertheless, that coal OF NATURAL GAS … TO SPIKE, AND TO could come back, perhaps through Low natural gas prices have undermined coal REMAIN VERY HIGH FOR LONG PERIODS some combination of political actions As shown in the figure opposite, natural OF TIME.’ and/or technology developments? gas prices collapsed between 2008 The answer is almost certainly no. and 2009, as a result of what has been Even without explicit federal policies Outside the coal industry and its circle called the ‘shale gas revolution’. And, to reduce greenhouse gas emissions, of allies, most financial and utility except for a few spikes, prices have the same inexorable market and analysts believe there is not much remained low. Forward prices suggest economic forces and advances in that can be done to bring coal back. that natural gas prices will remain low renewables technologies that have hurt S&P Global Ratings has concluded for the foreseeable future. the coal industry in the past decade that eliminating or rolling-back federal Low natural gas prices have will continue to undermine the financial environmental regulations will be of little disadvantaged coal in several viability of US coal-fired plants in help to the coal industry and that such significant ways. coming years. rollbacks would be ‘unlikely to quell the Also shown in the figure, low gas prices The coal industry attacked the Obama economic headwinds that have battered coal companies’ (SNL, 29 June 2017), have led to lower energy market prices in Administration, particularly the federal and has also said that it expects only competitive wholesale markets, because Environmental Protection Agency (EPA), a ‘minor uptick in coal production’ they have reduced the cost of operating for eight years, for waging a ‘war on coal’. from historic lows in 2016, attributing natural gas-fired combined-cycle plants However, the reality is that even without the closure of 100 gigawatts (GW) of (NGCC), especially the new, highly new environmental regulations, coal coal-fired generators since 2010 to low- efficient units that have come online in has become increasingly uneconomic priced natural gas. the last 15 to 20 years. These units are due to sustained low natural gas and increasingly setting market prices. energy market prices, increasing market Bloomberg New Energy Finance penetration of renewables, very-low- (BNEF) has concluded similarly that Because these NGCC units are less to-flat growth in demand for electricity, there is ‘little hope’ for coal due to the expensive to operate, they have and the ageing of the nation’s coal fleet. ongoing shift toward natural gas and increasingly been dispatched ahead Without addressing these underlying renewables, as well as broad increases of power from coal-fired plants, causes, the most that the coal industry in energy efficiency. BNEF also has whose operating costs have been can do is perhaps slow coal’s decline. observed that the energy sector of the flat or rising. This had led to the But even that is not certain. US economy is undergoing ‘a major displacement of energy from coal-fired

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Historical and future natural gas and energy market prices plants. The median capacity factor for Increased penetration of renewable 2017). The median installed price for coal-fired plants in 2016 was 57 per resources in energy markets poses a utility-scale solar PV projects has fallen cent, down from 76 per cent in 2008 substantial financial threat for coal by two-thirds since the 2007–2009 (before natural gas prices collapsed). period (Utility-Scale Solar 2016, The electric grid’s reliance on Lawrence Berkeley National Laboratory, renewables has grown dramatically in ‘LOWER NATURAL GAS PRICES HAVE September 2017). The installed prices the past decade as generation from MADE MANY FORMERLY PROFITABLE for small-scale distributed solar PV wind and solar PV resources has projects have also fallen (Tracking the COAL PLANTS OPERATE AT A LOSS …’ increased five-fold between 2008 and Sun 10, Lawrence Berkeley National 2016 (see the figure below). Laboratory, September 2017). In these ways, lower natural gas prices In recent years, dramatic increases have made many formerly profitable The performance of new renewables in wind and solar PV generation have coal plants operate at a loss – they are facilities has improved over those been driven by steep declines in generating (and selling) fewer MWh added in earlier years. Wind turbine installation costs. For example, the of electricity and, at the same time, capacity factors have increased average installed cost of wind projects earning less from each MWh they are significantly over time as a result of selling. Staff at the US Department of has dropped 33 per cent, from a design improvements such as higher peak in 2009 and 2010 (2016 Wind hub heights and larger turbine blades. Energy have identified the advantaged‘ Technologies Market Report, Lawrence Solar PV capacity factors also have economics of natural gas-fired Source: ner noration Ainistration. generation’ due to low gas prices as Berkeley National Laboratory, August improved. the ‘biggest contributor to [US] coal plant retirements’ (DOE, Staff Report to the Secretary on Electric Markets and Reliability, August 2017, page 13).

A total of 45 GW of new gas-fired combined cycle capacity was added to the electric grid between 2010 and 2016. An additional 19 GW is scheduled to be added in 2017, with a total of 81 GW of new NGCC plants potentially coming online in the next four years (SNL 1 November 2017). Even if only some of this gas-fired capacity is built, coal-fired generators will face increased competition US annual wind and solar PV generation and heightened risks in energy markets. Source: US Energy Information Administration.

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As a result of lower installation costs and the competitive markets, helping to with renewables resources. Because better performance, utility-scale solar PV keep energy market prices low while utilities can profit by rate-basing and wind power purchase agreement displacing energy from coal- and even investments in new wind resources, (PPA) prices have been declining gas-fired generators. In particular, solar many are replacing older, inefficient dramatically over recent years. Average PV generation keeps energy market coal-fired plants with wind capacity levelized wind PPA prices declined from prices lower during the peak afternoon (‘Rate-Basing Wind Generation Adds $70 per MWh to about $20 between 2009 periods when coal-fired generators would Momentum to Renewables’, Moody’s and 2016. Average levelized solar PV PPA otherwise be earning their highest profits. Investor Service, 15 March 2017). prices declined by 75 per cent from 2009 Generation from wind and solar PV also At the same time, renewables demand is to 2016, when they came down to about frequently leads to zero and negative increasingly coming from the corporate $35 per MWh for projects executed in energy market prices during some hours sector as a number of companies (such 2016. Further declines in PPA prices are in competitive wholesale markets. as Google, Walmart, Facebook, Mars, likely as installation prices continue to fall. Moody’s has concluded that declining and Nestle) have set goals to use 100 per Some clean energy investors expect wind generating costs puts 56 GW of coal cent renewables resources. It is estimated that wind and solar PV installation costs capacity in the Great Plains ‘at risk’ of that this direct purchase of renewables will decline so much that PPA prices will retirement (‘Rate-Basing Wind Generation from generators, which is outside remain low even after wind production Adds Momentum to Renewables’, traditional utility resource procurement, tax credits (PTC) and solar investment tax Moody’s Investor Service, 15 March will grow to between 10 GW and 50 GW credits (ITC) are gone – with unsubsidized 2017). Moody’s notes that ‘Wind power over the next five to seven years. PPA prices of $20–$30 per MWh for economics are driving coal generation up the dispatch curve and into early wind and $30–$40 per MWh for solar Slow-to-flat electricity demand PV by the early 2020s. These prices retirement’ (Utility Dive, 23 March 2017). would be below the operating costs of The same can be said for utility-scale Growth in domestic US electricity many coal-fired generators. solar PV investments. demand has slowed considerably in recent years. After averaging 2.5 per cent Distributed rooftop solar PV also As a result of these cost declines, annually in the late 1990s, growth slowed undercuts the profitability of coal-fired wind and solar PV have become major first to an annual average of 1 per cent generators. By reducing the loads on contributors to the electric generation from 2000 to 2008, and has remained the grid, distributed solar PV leads mix in large areas of the nation. Eight US relatively flat since then. In some areas, to lower energy market prices at the states generated more than 15 per cent demand has actually declined. This same time that it reduces the need for of their electricity in 2016 with wind: slowing of demand has been due to a generation from coal. three of these, Iowa, South Dakota, and number of factors, including: Oklahoma, generated more than 30 And more wind and solar PV resources the impact of formal energy efficiency per cent of their electricity from wind. are coming – perhaps as much as 100 programmes and investments, For limited periods in 2017, solar PV GW by 2022 – according to S&P Global resources provided 50 per cent of the Market Intelligence (SNL, 1 November increased interest from consumers in power in California, while wind provided 2017). Studies by regional ISOs show saving energy, more than 50 per cent of the power in that, with upgrades, the grid can rising generation from distributed Texas and the Southwest Power Pool handle substantially more renewables ‘rooftop’ solar PV resources, (which stretches from west Texas to the resource than it now has. For example, a decoupling between energy Canadian border). the Southwest Power Pool believes that, consumption and economic growth. with transmission improvements, it has US gross national product grew by the potential to serve as much as 75 per ‘WIND AND SOLAR PV CAPACITY POSE 1.6 per cent in 2016 while energy cent of its load from wind resources INCREASING LONG-TERM THREATS TO THE consumption fell by 0.2 per cent. (‘SPP Eyes 75% Wind Penetration FINANCIAL VIABILITY OF COAL PLANTS.’ This decoupling has resulted from Levels’, RTO Insider, 20 February 2017). strategies of industrial customers and Wind and solar PV capacity pose Future growth in renewables will be large utilities that have enabled them increasing long-term threats to the part of a ‘steel for fuel’ policy adopted to better manage their power use, and financial viability of coal plants. With by a growing number of utilities and from changing residential consumption no fuel costs, wind and utility-scale merchant generators. ‘Steel for fuel’ habits. All these factors are likely to solar facilities are dispatched first in means replacing fossil-fired generators dampen future demand growth.

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This means that as new gas-fired and Monitor for PJM Interconnection has renewables capacity is added to the grid, estimated that, depending on the precise ‘CARBON CAPTURE AND SEQUESTRATION competition increases for an electricity rule adopted, electric customers in PJM (CCS) TECHNOLOGIES HAVE NOT BEEN demand ‘pie’ that is not growing much, could pay an extra $10 billion to $288 PROVEN TO BE EITHER TECHNICALLY if at all. This competition will continue to billion over the next 10 years to subsidize FEASIBLE OR ECONOMICALLY VIABLE.’ disadvantage coal-fired plants by keeping the continued operation of those coal both energy market and capacity market and nuclear plants which fall within the remains unproven. Some estimates prices low for the foreseeable future. scope of the proposal (Comments of the state that adding capture technology Independent Market Monitor for PJM in to new or existing coal plants would Federal Energy Regulatory Commission Coal plant ageing raise the cost of generating power by Docket No. RM18-1-000). The existing US coal fleet is growing 60–80 per cent – meaning that unless old. Less than 8 per cent of the current The DOE has proposed this bailout heavily subsidized by consumers and/ 263 GW of the existing coal capacity even though its own August 2017 Staff or taxpayers, currently unprofitable in the USA is less than 20 years old. study found that environmental rules coal plants would become even less Only 13 per cent is less than 30. More have not been a significant cause of uneconomic compared to renewable than half is 40 years of age or older. coal and nuclear plant retirements. resources with declining costs. Ominously for the industry, more coal Interestingly, the author of the DOE The two completed projects in the USA capacity is older than 50 years (15 per Staff study has said that the coal plants with the potential for pre-combustion cent) than is younger than 30. that have closed in response to new capture of CO2, the Kemper and The ageing of the coal fleet means environmental regulations ‘were all failing Edwardsport projects, have been extremely expensive to build and that coal plants risk becoming even economically’ and their operators used operate. Southern Company’s flagship more unprofitable, due to the potential the regulations’ compliance deadline Kemper coal gasification plant in for higher operating and maintenance as a logical date to close them (‘Author Mississippi became so expensive (O&M) expenses (increasing capital Describes Writing Controversial DOE Grid to build (over $7 billion versus an expenditures to replace failing or Reliability Report’, Forbes, 12 November originally estimated $3 billion price tag) degraded plant equipment), and 2017). She also explained that the coal and had so many problems with its declining plant performance (such as and nuclear plants that the DOE proposal gasification system, that the owners higher heat rates and/or lower availability) was supposed to bail out ‘cannot provide have recently decided to stop burning (US Department of Energy (DOE) the essential resiliency and reliability’ that coal there. They will operate it as an Staff Report on Electricity Markets and the grid needs, such as voltage support. ‘Coal and nuclear plants are just not good extremely expensive natural gas unit Reliability, August 2017, pages 154–5). at anything but spinning reserve. They can’t with no capture of CO2. do anything except generate electricity that Duke Energy’s Edwardsport project in The federal government’s proposal to bail was once cheap and now ain’t so Indiana also experienced massive cost out coal plants would be expensive for cheap relative to the other stuff’ (ibid.). overruns, and operates unreliably. The consumers and taxpayers power it produces has cost almost five In the guise of ensuring electric grid Carbon capture and storage times as much as the cost of buying reliability by preventing the premature the same amounts of energy and All of the bailouts being discussed in retirement of ‘fuel secure’ baseload capacity from the markets. Although the USA today focus on preventing generators, a proposal by the US DOE Edwardsport was initially promoted further coal plant retirements. The would subsidize the continued as a way to cut greenhouse gas industry’s hope for a long-term way operation of tens of GWs of financially emissions, Duke decided early on to bring back coal rests on carbon struggling coal plants. that the plant would not attempt to capture and sequestration (CCS) capture any CO . A large number of groups – even technologies that have not been proven 2 including some coal-fired generators – to be either technically feasible or Kemper and Edwardsport show that have opposed the DOE proposal as an economically viable. At best, some pre-combustion CCS does not offer expensive bailout for old, inefficient coal test projects have captured some of any meaningful hope that the large- and nuclear plants that would damage, or the post-combustion carbon dioxide scale capture and permanent perhaps wreck, the nation’s functioning (CO2) emissions from coal plants. But sequestration of CO2 will be technically competitive power markets. The Market the cost is high and the technology feasible or economically viable.

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The USA and climate change: the importance of electricity David Robinson

Introduction natural gas will replace coal, although In Paris in December 2015, more than the economics for this are not nearly as 180 countries, representing more than This article considers the significance attractive outside the USA. Eventually, 95 per cent of global GHG emissions, of US withdrawal from the Paris meeting the PA goals requires deep pledged to make ‘intended nationally Agreement (PA) on climate change. penetration of RE and electrification of determined contributions’ (INDCs) The world’s combined pledges under other sectors, starting with transport and to meet the aims of the PA. Over 160 the PA are seriously insufficient to meet buildings. For this to happen, we need countries, including the USA, have the aims of the agreement and the new low-carbon storage technologies, withdrawal of any country is bad news. since ratified the PA, converting their market designs, and regulations, as When that country is the USA, there INDCs into NDCs. The combined well as falling costs of RE and storage. is a concern that other countries will pledges fall well short of the aims of the We also need international climate follow. However, the growing economic, PA, which explains why the agreement finance for decarbonized electricity and financial, and political pressures requires all countries to be more electrification in the developing world, favouring decarbonization in the USA ambitious in future. The developed where most incremental GHG emissions and abroad diminish the significance of countries, including the USA, committed will occur or be avoided. US participation in the PA. not only to adopt and meet increasingly ambitious GHG emission reduction The first part of this article provides: targets, but also to make financial ‘TRUMP’S POLICIES, ESPECIALLY HIS some background to the PA, US transfers to enhance climate resilience SUPPORT FOR COAL, COULD SLOW BUT pledges under that agreement, Trump’s and promote sustainable economic WILL NOT REVERSE US ELECTRICITY policies, and forecasts concerning growth in developing countries. US decarbonization. The next section DECARBONIZATION …’ explains the importance of the role The US NDC An analysis of the power sector played by electricity in decarbonizing illustrates the point. Trump’s policies, the US economy, along with remaining The US NDC under the PA is an especially his support for coal, could challenges. The last section draws economy-wide target to reduce net GHG slow but will not reverse US electricity conclusions. emissions by 26–28 per cent of 2005 decarbonization, the main source of levels by 2025; it includes land use and LULUCF – land use change and forestry CO2 reductions since 2005. Partly, this Background reflects domestic opposition to Trump’s that acts as a sink absorbing GHG. The The Paris Agreement policies and financial reluctance NDC builds on a US commitment at the The aims of the agreement are to to invest in coal-fired assets. More Copenhagen COP to reduce emissions strengthen the global response to the fundamentally, it reflects two trends: by 17 per cent by 2020 compared to threat of climate change, in the context 2005. The USA also pledged in Paris to gas-fired generation based on of sustainable development and efforts contribute $3 billion to the Green Climate low-cost unconventional gas to eradicate poverty by: Fund (GCF); this fund was established to displacing coal-fired generation; a) limiting the increase in the global assist developing countries in adaptation renewable electricity (RE) displacing average temperature to between and mitigation practices to counter conventional generation. 1.5 °C and 2 °C above pre-industrial climate change. As part of the PA, parties Electricity decarbonization will continue to levels; should develop long-term strategies. be a significant source of greenhouse gas b) increasing the world’s ability to The Obama Administration submitted an (GHG) emission reductions, regardless adapt to the adverse impacts of emissions reduction target of 80 per cent of whether the USA leaves the PA. climate change and fostering or more below 2005 levels in 2050. Whatever happens in the USA, climate resilience and low GHG According to the US Environmental accelerated closure of coal-fired development; Protection Agency (‘Fast Facts 1990– generation and the deep penetration of c) making finance flows consistent 2014’, EPA) net GHG emissions in RE are necessary globally to have any with a pathway towards low GHG 2005 were approximately 6,060 million chance of meeting the PA targets. Initially, and climate-resilient development. metric tons carbon dioxide equivalent

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(MMmtCO2e), including LULUCF (the emissions reductions was 13–23 per author has converted the EPA data ‘[TRUMP’S] ADMINISTRATION HAS cent by 2025. The report stressed the from short tons to metric tons). With BEEN BUSY ROLLING BACK US CLIMATE potential to reduce emissions further, this 2005 baseline, meeting the targets POLICIES ADOPTED DURING THE OBAMA notably through federal and state implies reducing annual emissions by PRESIDENCY.’ policies supporting replacement of approximately 1,030 MMmt in 2020 and coal. In short, these forecasts suggest 1,575 MMmt in 2025. Under the US NDC, significant uncertainty about US GHG Trump’s policies are more important emission reductions will come primarily emissions and pessimism with respect for US efforts to address climate from the energy sector, including: to meeting the USA’s international change than his PA announcement. commitments. a) stricter fuel economy standards for His Administration has been busy vehicles; rolling back US climate policies The importance of decarbonizing electricity b) measures to conserve energy in adopted during the Obama presidency buildings; (see Colombia Law School Climate There is a growing policy consensus Deregulation Tracker). In March c) restrictions on methane emissions; that there are two necessary, although 2017, his Executive Order on ‘energy and insufficient, steps to meeting PA independence’ rescinded the Climate targets: decarbonization of electricity d) cutting emissions from coal-fired Action Plan, which was critical to and the electrification of transport and power stations. achieving the US NDC. In October buildings. The remainder of this article Of the 2005 total, electricity generation 2017, the EPA Administrator signed focuses on illustrating the importance accounted for 2,177 MMmtCO2e and a rule to repeal the Clean Power Plan of electricity decarbonization. transportation for 1,723 MMmtCO2e, (CPP), whose primary goal was to together close to two-thirds of the total. reduce emissions from coal-fired Most US CO2 emission reductions have generation. (This Plan had previously come from the electricity sector been held up in court following an Trump’s PA announcement and policies Between 2005 and the end of 2016, the appeal by states that were opposed President Trump’s announcement of US Energy Information Administration to it.) His administration is now the US intention to withdraw from the (EIA) estimates that annual energy- considering a new import tariff on solar PA was no great surprise. This was a related CO2 emissions (80 per cent panels, and Secretary of Energy Perry signal to his domestic political base of GHG emissions) fell by 13.7 per has proposed an additional payment and especially to supporters from cent, from 5,993 to 5,170 MMmtCO2e. to coal plants to compensate for their the fossil fuel industry. It was also Rhodium estimates that the electricity contribution to system security. a further example of his intention to sector was responsible for about 70 undermine multilateralism and ignore per cent of these reductions. The figure US international commitments. Forecasts with respect to meeting US NDC overleaf reflects the relative importance The Rhodium Group concluded in May of electricity decarbonization. In the USA, there has been a strong 2017 that the USA was within striking negative political and public reaction to Two factors account for the lower distance of its Copenhagen target the Trump announcement. In particular, carbon emissions (and lower carbon of a 17 per cent reduction by 2020, the We Are Still In platform represents intensity) of electricity: largely due to a reduction of about 684 cities, states, corporations, faith-based MMmt (754 million tons) in annual GHG substitution of coal-fired generation groups, universities, and other groups emissions between 2005 and 2015. by gas-fired plants, and that are committed to the goals of growth in wind and solar power. the PA. It includes cities and states But absent new policies, Rhodium’s representing over 56 per cent of the US baseline forecast was that the USA According to the EIA, (US Energy- population. Abroad, COP23 (the UN was on course for a 15–19 per cent Related Carbon Dioxide Emissions,

Climate Change Conference) in Bonn in reduction in GHG emissions by 2025 2016), between 2005 and 2016 CO2 November 2017 confirmed that the rest – considerably short of its NDC target emissions from the power sector of the world appears to be committed of 26–28 per cent compared to 2005 declined by a cumulative 3,176 MMmt. to the PA. Other countries, notably levels. Taking account of uncertainty Of that, 2,007 MMmt were due to the China, India, and Canada, together with related to economic growth, the shift to natural gas and the remainder the EU, appear to be seeking to fill the cost of natural gas and REs, policy to the increase in non-fossil electricity, leadership gap. variables, and LULUCF, their range of especially wind and solar. Fossil fuel

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two columns

USWHAT’S carbon NEXT FORdioxide US ENERGY emissions POLICY? by sector (2005–16) Source: https://www.eia.gov/totalenergy/data/monthly/#environment.

2,500 financial appetite to invest in plants facing a significant risk of being 2,000 transportation stranded assets. The assets may soon electric power 1,500 be uneconomic due to competition industrial 1,000 from gas and RE, or be stranded if a

emissions (million new administration reversed Trump’s

metric tonnes) metric residential 2 500 decisions before (or soon after) they CO commercial 0 come into effect. Secretary of Energy Perry is pressing for an additional payment for coal-fired US carbon dioxide emissions by sector (2005–16) Source: https://www.eia.gov/totalenergy/data/monthly/#environment. generation on the grounds that these plants provide resilience to the system. His proposal faces stiff political and electricity generation declined by The cost advantage of natural gas over legal resistance from utilities, states, about 9 per cent, non-fossil electricity coal reduces the running hours and and other lobbies that wish to close the generation rose by 25 per cent, and profitability of coal-fired generation. If plants. But even if it were introduced, electricity demand grew by 1 per cent. this advantage is maintained, which is the payment would be for capacity and likely, it will accelerate the closure of would probably not affect the variable ‘THE DECARBONIZATION OF THE existing coal plants, even without the running cost. Existing coal-fired plants additional regulatory requirements might remain open longer, but run very ELECTRICITY SECTOR REFLECTS A LONG- associated with the CPP. little because there would be less TERM TREND AWAY FROM COAL.’ expensive electricity from other Second, there is strong civil society sources, notably natural gas and RE. The decarbonization of the electricity opposition to coal-fired generation. sector reflects a long-term trend away For instance, the Sierra Club maintains Looking forward – renewable energy from coal. Coal’s share of electricity that their Beyond Coal Campaign has The share of RE will definitely increase, generation fell from 53 per cent in 1990 been responsible for the retirement (or although how far and how quickly to 30 per cent in 2016, while the share planned retirement) of over 265 plants depends on policy support and represented by natural gas rose from since 2010. They have another 258 increasingly on economics. 12 per cent in 1990 to 34 per cent plants in their sights. They argue that in 2016. Wind and solar have risen the electricity sector alone could reduce First, the economics of RE have steadily, accounting for 16 per cent of US GHG emissions by an additional improved substantially. The recent IEA non-carbon resources in 2016, up from 500 MMmt by 2025, primarily through World Energy Outlook (WEO-2017) notes less than 1 per cent in 2000. demand reduction and by replacing that in ‘2016, growth in solar PV capacity coal-fired power stations by natural gas was larger than for any other form of and RE. If this forecast proves correct, generation; since 2010, costs of new Looking forward – coal versus natural gas by 2025, electricity decarbonization solar PV have come down by 70 per cent, There was an initial sense of optimism alone will have reduced US GHG wind by 25 per cent and battery costs among the coal community that coal emissions by about 17 per cent since by 40 per cent’. In their New Policies might make a revival when President 2005. Groups like the Sierra Club and scenario, which reflects existing policies Trump arrived, and coal-based the World Wildlife Fund (WWF) rely and announced intentions to 2040, the generation did rise in the first six months heavily on local grassroots support, but IEA argue that RE will capture two-thirds of 2017. However, the latest data are also ready to challenge in the courts of global investment in power plants as suggest that coal-based generation in any regulations or policies that favour they become, for many countries, the 2017 is roughly unchanged from last coal or penalize decarbonization, and least-cost source of new generation. year. The future for coal looks bleak. to mount powerful campaigns within the This view is supported by the financial There are three reasons. USA and abroad. For instance, the WWF and corporate sectors. For instance, is behind the We Are Still In coalition. First, the economics now favour natural a recent study by the investment bank gas. The switch from coal to natural gas Third, even if Trump’s policies manage Lazards concluded that the levelized reflects the very low prices of natural gas to prolong the lives of some US coal costs of energy for wind and utility- resulting from the shale gas revolution. plants, there is very limited, if any, scale solar were now lower than for

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gas and coal-fired plants. Meanwhile, a to develop low-carbon sources of growing number of large corporations flexibility and storage, from batteries ‘THE GREATEST BARRIER TO MEETING are committing to buying only RE. and flywheels to more traditional THE THREE OBJECTIVES OF THE PARIS technologies like pumped storage AGREEMENT IS CARBON-INTENSIVE Second, federal tax credits provide (which accounts for over 90 per cent ECONOMIC DEVELOPMENT IN THE important investment incentives for of storage today). But introducing RE solar PV and wind power. The tax DEVELOPING WORLD …’ and low-carbon flexibility is not simply regime will last until 2020, unless a matter of technological innovation. modified by new tax legislation, which agreements, while continuing to reduce It is also about market and regulatory had not yet been passed at the time GHG emissions, whether or not it is a reform. At the Oxford Institute for of writing this article. These tax credits signatory to the Paris Agreement. Energy Studies, we are developing new are unlikely to disappear altogether consumer-driven market designs and because of support from states of policies to integrate high levels of RE Sustainable development different political colour. In any case, (see for instance, ‘The decarbonised The greatest barrier to meeting the three as the economics of RE improve, the electricity system of the future: the “two objectives of the PA is carbon-intensive credits become less important. market” approach’, Malcolm Keay and economic development in the developing world, especially in countries that face Third, at the state level, Berkeley David Robinson OIES Energy Insight: rapid population and economic growth. Lab reports that renewable portfolio 14, June 2017). This is one area where Trump’s policies standards (RPS) have accounted for As electricity is decarbonized and could make matters much worse. The roughly half the growth in US RE since storage options become cheaper, the US decision to withdraw from the Paris 2000. An RPS requires suppliers to economic and environmental logic for Agreement means the USA will not pay meet a share of consumer demand electrifying the rest of the economy the remaining $2 billion of the $3 billion it from RE. Twenty-nine states now have will strengthen and, in some cases, be had committed to the GCF. Worse, the RPS covering 56 per cent of US retail overwhelming. However, electrification USA would presumably be reneging on demand. Anticipated RPS growth will require, inter alia: the commitment made by the developed implies a 50 per cent increase in RE new fiscal policies for the energy sector countries to mobilize US$100 billion per generation by 2030, equating to 55 GW to internalize the local and global annum by 2020 for climate financing for of new capacity. Like most forecasts of environmental externalities associated developing countries. Furthermore, the RE, this one probably underestimates with the use of fossil fuels, US federal government is in a position to the growth in the USA. The National influence energy policies of developing Renewable Energy Laboratory, for new electricity charging structures to countries, for instance through export instance, argues that renewables, minimize the cost of increased use of credit guarantees, lending policies of combined with a more flexible electric electricity, and international financial institutions like the system, will be more than adequate to new thinking about the role of markets World Bank, and direct political pressure. supply 80 per cent of total US electricity and governments when it comes to Whereas the Obama Administration generation by 2050. dealing with the stranded assets that used this influence to press for energy will result. decarbonization and climate finance for ‘RENEWABLES, COMBINED WITH A MORE the developing world, the Trump Concluding comments FLEXIBLE ELECTRIC SYSTEM, WILL BE Administration is doing the opposite. MORE THAN ADEQUATE TO SUPPLY US energy strategy is different This deserves greater attention and 80 PER CENT OF TOTAL US ELECTRICITY The US energy situation is changing remedies. In particular, investors and because of the growth of unconventional regulators in the world’s major financial GENERATION BY 2050.’ hydrocarbons and the diminishing markets should demand disclosure of concern over energy security. Meanwhile climate-related risks related to Energy sector decarbonization in the USA other countries are concerned about investment in carbon-intensive activities, Solar and wind energy are intermittent growing oil and gas import dependence wherever they occur. Furthermore, sources of electricity requiring backup, and may feel greater pressure to signatories to the PA should do what initially from flexible, conventional cooperate for security reasons as well they can to limit efforts by the USA to use power stations. To meet the PA goals, as to address climate change. The USA international institutions like the OECD deep penetration of intermittent RE may be content to be a bystander in and the World Bank to promote the use requires research and financial support future, as it has in many international of coal-based electricity.

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Recent Research Papers Assessing Kuwaiti energy pricing The Council Legal Service’s The potential market for LNG in the reforms assessment of the European Caribbean and Central America by Manal Shehabi Commission’s negotiating mandate by Ieda Gomes and Martin Lambert November 2017 and what it means for Nord Stream 2 by Katja Yafimava December 2017 Completion design changes and the October 2017 A structural model of the world impact on US shale well productivity oil market: the role of investment by Trisha Curtis and Benjamin The OPAL Exemption Decision: dynamics and capacity constraints Montalbano a comment on the CJEU’s ruling in explaining the evolution of the real November 2017 to reject suspension by Katja Yafimava price of oil Local content and procurement September 2017 by Andreas Economou, Paolo Agnolucci, requirements in oil and gas contracts: Bassam Fattouh, and Vincenzo De Lipsis regional trends in the Middle East Fiscal policy for decarbonization December 2017 and North Africa of energy in Europe Challenges to the future of gas: by Damilola Olawuyi by David Robinson unburnable or unaffordable? November 2017 September 2017 by Jonathan Stern Gas and taxes: the impact of Russia’s A restrained optimism in Canada’s December 2017 tinkering with upstream gas taxes on oil sands Gasoline demand in transport in non- state revenues and decline rates of by Peter Findlay OECD Asia legacy gas fields August 2018 by Vitaliy Yermakov and Daria Kirova by Anupama Sen, Michal Meidan, and Recent Energy Comments Miswin Mahesh October 2017 OPEC’s hard choices November 2017 Electricity market design for a by Bassam Fattouh Gasoline demand in non-OECD Asia: decarbonised future: an integrated November 2017 drivers and constraints approach US crude exports – gaining ground by Anupama Sen, Michal Meidan, and by Donna Peng and Rahmat Poudineh by Dominic Haywood Miswin Mahesh October 2017 November 2017 November 2017

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