US Energy Policy: Fantasy vs. Reality · Marginal oil wells tend to decline at about 3 percent per...

US Energy Policy: Fantasy vs. Reality

Oil & MoneyThe 30th Anniversary Conference

Lucian PugliaresiEnergy Policy Research Foundation, Inc

LondonOctober 20, 2009

Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org

2Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org

EPRINCFighting Ignorance About Oil and Gas Markets Since

1944*

www.eprinc.org

* It’s taking longer than we thought.

What are the Energy Policies of the Obama Administration?

• 1 million plug-in-electric hybrid vehicles (PHEVs) on the road by 2015

• 5 million new green jobs by investing $150 billion over 10 years

• Reducing US oil consumption within 10 years by 2- 3 mb/d

• Requiring 10 percent of the nation's electricity to come from renewable energy by 2012 and 25 percent by 2025.

• Establishing an economy-wide cap-and-trade program that cuts US greenhouse gas emissions (Waxman-Markey calls for cuts of 2 gigatons by 2030)

Not a Complete List!!!!

A Few of the Administration’s Implementation Strategies

• Higher taxes on upstream and downstream operations – to provide more funding for renewables (US is over investing in oil and gas)

• Mandates -- biofuels and use of renewables in electricity generation

• Subsidies for Green Job Technologies• Cap and Trade• Expanding Nuclear and Upstream Petroleum

Production?

Tax Proposalsin Treasury Green Book

• Repeal of IDC expenses• Repeal G&G Expenses• Raise Corporate Income Taxes – for Oil and

Gas Operations Only• Repeal of Percentage Depletion Allowance• Fee on Non Producing Leases• And Lots More………………………………….

Energy Subsidies Not Related to Electricity Production


Category Fuel Consumption (Quadrillion BTU)

FY 2007 Subsidy and Suppot (million 2007 dollars)

Subsidy per Million BTU

Coal 1.93 78 0.04Refined Coal 0.16 214 1.35Natural Gas and Petroleum Liquids 55.78 1921 0.03Ethanol/Biofuels 0.57 3249 5.72Geothermal 0.04 1 0.02Solar 0.07 360 2.82Other Renewables 2.5 184 0.14Hydrogen * 230 NMTotal Fuel Specific 60.95 6237 0.1Total Non-Fuel Specific NM 3597 NMTotal End-Use and Non-Electricity NM 9834 NMSource: EIA Data

Recent Trends in Oil, Gas, and Coal Prices

0

5

10

15

20

25

30

$/m

illio

n BT

U Henry Hub Natural Gas Futures Contract 1 (Dollars/Mil. BTUs)

Central Appalachian Coal (12,500 btu/lb) 1.2 SO2 (Dollars/Mil. BTUs)

Weekly Cushing, OK WTI Spot Price FOB (Dollars/Mil. BTUs)

Source: EIA data, EPRINC Calculations


U.S. Crude Oil Production, Consumption, and Imports

Source: : EIA Data, EPRINC Calculation. NGLs are not included in any of these data sets.

0

5

10

15

20

25

mbd

U.S. Net Imports of Crude Oil and Petroleum Products

U.S. Field Production of Crude Oil

U.S. Product Supplied of Crude Oil and Petroleum Products, Minus NGLs and Liquid Refinery Gases

Imports

Production

8

Projected Petroleum Imports -- US

0

5

10

15

20

25

1960 1970 1980 1990 2000 2010 2020 2030

Consumption

Domestic Supply

Net Imports 60%

54%

History Projections

mill

ion

barr

els p

er d

ay

Source: EIA/AEO 2008



Stripper Well Production

Source: EIA Data, http://www.eia.doe.gov/pub/oil_gas/petrosystem/us-3o.html

8

10

12

14

16

18

20

65 67 69 71 73 75 77 79 81 83 85

Perc

ent o

f Oil

Prod

uctio

n

Percent of Oil Wells

10

Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org11

1

1.2

1.4

1.6

1.8

2

2.2

Jan-

1973

Jan-

1974

Jan-

1975

Jan-

1976

Jan-

1977

Jan-

1978

Jan-

1979

Jan-

1980

Jan-

1981

Jan-

1982

Jan-

1983

Jan-

1984

Jan-

1985

Jan-

1986

Jan-

1987

Jan-

1988

Jan-

1989

Jan-

1990

Jan-

1991

Jan-

1992

Jan-

1993

Jan-

1994

Jan-

1995

Jan-

1996

Jan-

1997

Jan-

1998

Jan-

1999

Jan-

2000

Jan-

2001

Jan-

2002

Jan-

2003

Jan-

2004

Jan-

2005

Jan-

2006

Jan-

2007

Jan-

2008

Jan-

2009

trill

ion

cubi

c fe

et

U.S. Natural Gas Marketed Production1973-2009

Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org 12

Lost Production Breakeven Points for Repeal of Percentage DepletionWhere Increased Revenue to Treasury = Financial Loss to U.S. Economy from Higher Crude Oil Imports, 2010 – 2020

Source: Source: EPRINC calculations. Marginal oil wells tend to decline at about 3 percent per year. The loss in the depletion allowance will likely increase this rate of decline to anywhere from 4 to 13 percent per year. Natural gas production, which has experienced very low prices as gas values, at least for the near term have decoupled from crude oil, is probably even more at risk.

0

100

200

300

400

500

600

700

800

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

000

bd o

f Los

t Pro

duct

ion Baseline Historical Natural Decline

Rate (1994-2006), 3%/yr

4%/yr decline, +1% over base

13%/yr decline, +10% over base

Revenue Neutral Breakeven Point for Percentage Depletion

Waxman-MarkeyCap and Trade

• It May Not be the Most Costly Approach for Removing Carbon – But its Close

Or• How to End Refining as We Know It

What it takes to offset 1 gigaton of carbon…

Source: DOE Climate Change Technology Program

TODAY’S TECHNOLOGY Actions providing 1 Gt mitigation/year

Coal-fired power plants Build 1,000 “zero-emission” 500 MW coal-fired power plants

Geologic sequestration Install 3,700 sequestration sites like Norway’s Sleipnerproject (0.27 MtC/year)

Nuclear Build 500 new nuclear plants, each 1 GW in size

Efficiency Deploy 1 billion new cars at 40 miles per gallon (mpg) instead of 20 mpg

Wind energy Install capacity to supply 50 times the current global wind generation

Solar photovoltaics Install capacity to supply 1000 times the current global solar PV generation

Biofuels for transport Convert a barren area 15 times the size of Iowa’s farmland (30 million acres) to biomass production

CO2 storage in forests Convert a barren area 30 times the size of Iowa’s farmland to new forest


Number of U.S. Refineries and Capacity

0

50

100

150

200

250

300

350

0

2

4

6

8

10

12

14

16

18

20

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Refin

erie

s

mbd

Capacity Refineries

Source: EPRINC calculations, EIA data

Gasoline Imports to U S1970-2009

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Jan-

1970

Jul-1

971

Jan-

1973

Jul-1

974

Jan-

1976

Jul-1

977

Jan-

1979

Jul-1

980

Jan-

1982

Jul-1

983

Jan-

1985

Jul-1

986

Jan-

1988

Jul-1

989

Jan-

1991

Jul-1

992

Jan-

1994

Jul-1

995

Jan-

1997

Jul-1

998

Jan-

2000

Jul-2

001

Jan-

2003

Jul-2

004

Jan-

2006

Jul-2

007

Jan-

2009

Gasoline Imports Share …

Source: EIA data, EPRINC calculations

US Refinery Capacity Utilization1985-2009

60

65

70

75

80

85

90

95

100

13.5

14

14.5

15

15.5

16

16.5

17

17.5

18

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

% U

tiliz

atio

n

mbd U.S. Percent Utilization of Refinery

Operable Capacity

U. S. Operable Crude Oil Distillation Capacity (Thousand Barrels per Day)

Source: EIA data, EPRINC Calculations

Compliance Costs: US Refining Industry

0

10

20

30

40

50

60

70

80

2012 2015 2020 2025 2030

billi

on $

ann

ually Cost of Allowances to Cover Product

Combustion

Cost of Allowances to Cover Stationary Source Emissions

Total Cost of Allowances, Stationary Source and Product Combustion – net of 2 % allocation

Effective Cost of Production: US Product Slate

6

7

8

9

101 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100

103

106

109

112

115

118

121

$/bb

l

EPRINC COST EFFECTIVE COMPLEXITY INDEX

5 mbd 10 mbd 15 mbd

Source: EPRINC Calculations from OGJ and proprietary refinery data sets of complexity, product slate valuations, and location. Product slate standardized to common EPRINC product/cost value index.


U.S. Refiners' Future Cost of Production(2015 - 2030)

Source: EPRINC Calculations, EIA Data

0

5

10

15

20

25

30

35

$/bb

l

Blend Wall Costs

Stationary Emissions Costs @ $40/ton

Stationary Emissions Costs @ $20/ton

Section 199 Costs

Product Combustion Costs @ $20/ton

Effective Production CostMost Complex

Generally LargerLeast Complex

Generally Smaller

5 mbd 10 mbd 15 mbd

20

Pass Through or Capacity Losses2015-2030

Source: Forthcoming EPRINC report on “Capacity Consequences of Waxman-Markey Cap and Trade Program.” EPRINC calculations.

Conclusions• Administration Still Running on Belief System

i.e., – Oil is Bad and Renewables Are Good, but

Numbers are Disturbing…………….

• Trade and Implementation Risks Associated with Waxman Markey Not Well Understood, and a Long Fight is Ahead

Extra Slides for Questions and Answers


Source: EIA Data, DOE Data, EPRINC Calculations

FFVs and E85 Usage

0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%9.00%10.00%

0

1

2

3

4

5

6

7

2003 2004 2005 2006 2007

Mill

ion

Vehi

cles

Light Duty E85 FFV's In Use% of FFV's Actually Operating on E85

The Blend Wall in a low RBOB World

25

0

0.5

1

1.5

2

2.5

1 2 3 4 5 6 7 8 9 10 11 12 13

$/ga

llon

% of Gasoline Pool

RBOB (NYMEX Futures: March Delivery) Ethanol's Value Relative to Gasoline Ethanol (CBOT Futures: March Delivery)

Corn Feedstock - $ per gallon of Ethanol All In-Cost of Ethanol Production

Falling values for ethanol will be mirrored by rising values for RINs

After serving its role as an oxygenate, ethanol must compete directly with gasoline

Estimated all-in cost for ethanol: corn + operating costs + capital costs

Ethanol loses significant value as it moves into E85

Price difference between ethanol and RBOB

Blender's Credit: $0.45/gallon


EISA ’07 Renewable Fuels Standard

Source: DOE, EIA Data and June 2009 STEO. Blend wall assumes projected 2009 gasoline consumption found in the June 2009 EIA STEO.

0

5

10

15

20

25

30

35

40

45

50

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Billi

on G

allo

ns

Biomass based Diesel

Any Advanced

Cellulosic Advanced

Corn Ethanol / Other

EPACT 05

10% Ethanol Penetration (The Blend Wall)

4.2 5.81.9 1.3 0.95 1.3 2 1.7 0

20

40

60

80

100

120

140

160

70

75

80

85

90

95

2001 2002 2003 2004 2005 2006 2007 2008e

$/bb

l

Glo

bal P

rodu

ctio

n, m

illio

n b/

dA Series of Unfortunate Events Leading to New Expectations

World Oil Production (EIA) Expected Production (EIA 2001 Predictions)OPEC Excess Capacity (EIA) Crude Oil Price

Positive Expectations Expectations Shift Negative Expectations

Yukos -- Kremlin taking control of Russian oil

development

Oil development in Iraq delayed

Russia takes over Sakhalin II, Chavez Nationalizes

Projects

Nigeriarebels hurt

output

Continuing civil strife in Sudan,

Nigeria

OPEC Excess Capacity remains limited

Congress continues ban on ANWR and offshore

developmentOutlook positive for

expanded output from Nigeria, Mexico, Venez.,

Russia, North Slope

US Energy Policy: Fantasy vs. Reality · Marginal oil wells tend to decline at about 3 percent per...

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