US oil, gas industry eager to build on past successes

Feb. 2, 2015
The US oil and gas industry entered 2015 optimistically as a dramatically improved US supply outlook's economic and security benefits became increasingly apparent.

The US oil and gas industry entered 2015 optimistically as a dramatically improved US supply outlook's economic and security benefits became increasingly apparent. So did the need to reform or repeal regulations enacted 40 years earlier after import disruptions and declining US production had an entirely different effect.

Trade association leaders generally felt Republicans gaining full control of the 114th Congress by becoming the majority in the Senate after 2014's elections means reforms ranging from repealing-or at least radically reforming-the federal Renewable Fuels Standard (RFS), to ending the crude oil export ban will finally be fully discussed.

But they also warned that the Obama administration still could move aggressively to address global climate change and other environmental problems in ways that potentially stymie additional energy and economic progress.

"We have a once-in-a-generation opportunity to show the world how energy abundance can be used as a positive force, rather than as a tool to harm or control other nations as some still use their energy abundance," American Petroleum Institute Pres. Jack N. Gerard said in his Jan. 6 State of American Energy address.

"We should no more adopt or tolerate policies that pull us back toward energy dependence and uncertainty than we should adopt policies that reserve gains we've made in other areas of our society," Gerard said. "Our vision is one that safeguards the progress we've made and builds on it."

Nine days later, in a teleconference with reporters, Gerard said US President Barack Obama could claim credit for energy achievements in his Jan. 20 State of the Union address while proposing policies that would undermine such progress. "Instead of being the party of 'science,' this administration has let politics decide far too many energy policies," he said.

Infrastructure needs

Improving the nation's oil and gas transportation systems is crucial, every association leader OGJ interviewed agreed. "Realizing our enormous growth opportunity becomes not a matter of if, but when, when we get the right infrastructure," America's Natural Gas Alliance Pres. Martin J. Durbin said on Jan. 9.

"It's being highlighted in energy because we're seeing so much activity," Durbin said. "But infrastructure is an urgent issue across the economy for roads and bridges, waterways, and rail."

The US gas transmission system is good, but could be improved, Durbin said. "We're talking now about bidirectional lines out of the Marcellus and Utica shales not just for gas, but for natural gas liquids to fuel Gulf Coast petrochemical plants," he said. "Some might go so far as to say we're talking about a Rust Belt manufacturing rebirth."

Martin E. Edwards, vice-president for legislative affairs at the Interstate Natural Gas Association of America, meanwhile, said, "The opportunities the gas and oil revolution has provided in the US in the last decade have been unequaled anywhere else."

Edwards said, "We not only have the energy resource, but the infrastructure and human resources to take advantage of it. Certainly, every other country would see it as an epic opportunity not only for energy, but for many other associated industries which are taking advantage of this newly found resource."

Interstate gas pipeline owner-operators will spend much of 2015 working with the US Pipeline and Hazardous Safety Administration and stakeholders such as pipeline safety advocates and state inspectors to reauthorize federal pipeline safety regulations.

Pipeline permitting issues

"We recognize that it's in the industry's interest to have a good legal framework and credible regulator to help keep operations safe," INGAA Pres. Donald F. Santa said. "It doesn't happen by magic. A lot of people work hard on it."

He said pipeline permitting is another issue-not so much with the US Federal Energy Regulatory Commission, but with other state and federal agencies that become involved. The 2005 Energy Policy Act designated FERC lead agency in the process and assigned deadlines for other government regulators to meet, which are not adequately enforced.

HR 161, which House Energy and Commerce Committee member Mike Pompeo (R-Kan.) introduced on Jan. 6, addresses this. INGAA and ANGA support the measure, which Pompeo originally offered and the House approved in 2014 but was not considered by the Senate. "We support ways to get infrastructure in place," Durbin said. "We want to let everyone make comments, but we also have to provide the necessary timelines and certainty to make investments possible."

US Sec. of Energy Ernest G. Moniz has said it's important for the US energy infrastructure to be not just extensive, but resilient. Edwards and Santa both said gas pipelines demonstrated that quality following Hurricanes Katrina and Rita in 2005 as well as during the Polar Vortex early last year.

But the US oil and gas industry-from wellhead to burner tip-also faces the prospect of new regulations specifically aimed at limiting its methane emissions. The Obama administration said on Jan. 14 that the US Environmental Protection Agency, Bureau of Land Management, PHMSA, and other federal agencies would take steps in this direction during 2015. Technology has reduced such releases from hydraulic fracturing by 77% since 2011, "yet some call for regulatory oversight over something the industry is already addressing," Gerard said in his Jan. 6 address.

Durbin said, "The industry and agencies looking at this aren't far apart. The problem is that the Environmental Defense Fund and similar organizations want what already is an incredible success. We're absolutely opposed to directly regulating methane because the industry already is addressing pneumatic devices and other identified problems. We want to keep this progress going. Trying to regulate it directly actually could slow things down."

Many uncertainties

The Independent Petroleum Association of America is concerned that trying to regulate methane emissions would create significant uncertainties for producers by hammering on cost-effectiveness and existing technology, especially if it's expanded from new to existing sources, officials told OGJ.

"It's a problem not just for the industry, but also for regulators," IPAA Pres. Barry Russell said. "If EPA regulates gas emissions from new wells, it would be challenging. If it tries to regulate existing sources, it would be extremely difficult."

Edwards said industry opponents may consider curbing methane emissions as "a way to knock gas off its tracks, but it's not going to be a show-stopper" if the industry shows it can address the problem responsibly.

"The past several years have been stunning, with gas moving from a bridge to a concept fuel, making it part of the national fuel mix for some time," Edwards said. "It could be a major contributor without a lot of government intervention that could help achieve national economic and security goals."

Santa adds, "There are always challenges and the possibility of curve balls. But the fundamentals for gas remain extremely good. It's front and center now, and it has to perform accordingly."

Durbin also saw significant potential for gas's contributions to grow not only in electric power generation, but also in rail, marine, and truck transportation as LNG or CNG. Several states are creating LNG-CNG refueling corridors, more producers run their drilling rigs with gas, and UPS invested $50 million for CNG refueling between Austin and Knoxville, Durbin said. "Lower diesel prices are affecting paybacks, but the momentum is there."

Priorities for reforms

Oil and gas trade association officials would like to see Congress and the administration reexamine both the crude-oil export ban, which was imposed in 1975 and has been slightly modified in the time since, and the RFS, which the 2005 Energy Policy Act established and the 2007 Energy Independent and Security Act significantly expanded.

"We believe crude exports should be focused on early-the sooner, the better," Gerard said following his Jan. 6 address. "Congress and the administration should each use their authority and work together for more open global markets." Lifting the ban, he said in his speech, would send a clear signal to other countries that the US takes seriously its role as an energy leader, and unleash its full potential economically, social, politically, and environmentally.

IPAA listed ending the crude export ban as the first priority in its 2015 Legislative and Regulatory Outlook. "I think it's the biggest short-term challenge for our members," Executive Vice-Pres. Lee O. Fuller said. "The problem is that the public doesn't understand production and refining fundamentals. As crude prices rebound, gasoline prices will go back up, which would be difficult politically."

A lot of public education will be necessary to generate support for ending the ban, Fuller said. "We're trying to help as many people understand what's involved," he said. "An array of analyses in the past year show crude exports could be an important component of our economic policy."

The question is complex because new US oil production from tight shales produces lighter crudes when most US refineries are configured to process heavier grades. The ones that process light crude face higher transportation costs for US production than their foreign competitors because the Jones Act requires goods transported over water between US ports to move on more expensive US-flagged vessels.

American Fuel & Petrochemical Manufacturers Pres. Charles T. Drevna would like to see the Jones Act linked to the crude export debate. "It can't be divorced," he said. "On the other hand, recent world market events raise export questions. Will the US crude production growth continue at the current price? Many studies which are cited have been more advocacy than econometrics. Let's not rush head-long into this."

Problems with RFS

API and AFPM agree that implementing requirements under the RFS has created so many problems that it needs to be reformed extensively, if not repealed outright. "[RFS] has outlived its usefulness, and could create serious fuel supply disruptions and, by some estimates, a rise in the cost of gasoline by as much as 30% and diesel fuel by as much as 300%," Gerard said.

Drevna said, "EPA was handed a bad, hard-to-implement law, and it's done a terrible job in implementing it. We used to be in limbo. Now, we're in purgatory." Drevna said the agency acknowledged that a blend wall-under which refiners are not able to get adequate biofuels to meet growing quotas-does exist. But it has missed deadlines to issue those quotas since 2008, "and it keeps getting later," he said.

Drevna said refiners also remain concerned with how EPA administers Renewable Identification Numbers, the biofuel credits refiners can buy to help meet their biofuel quotas, because RINs have become so expensive that they have become a commodity in themselves. "That was not Congress's intent," he said.

But Drevna said that another federal regulation-Corporate Average Fuel Economy (CAFE) standards-also might have a major impact since automakers have to sell a certain number of smaller cars to meet them. Those cars run on higher compression engines, which crave octane, he said.

"If things don't change, consumers could walk into a showroom around 2017, look at generally smaller, higher-cost vehicles, and realize many of them will need premium gasoline," Drevna said. "I don't think they're going to be happy about it."

Refiners continue to debottleneck their plants and discuss drivability with the automotive industry, Drevna said. "Automakers are trying to decide which way they're going to go to meet mandates," he said. "We're coming to a confluence of CAFE standards, climate change, and other issues."

Issues for producers

Independent producers, meanwhile, also will continue defending federal tax code provisions such as intangible drilling cost (IDC) deductions, the percentage depletion allowance, and the passive loss exclusion that they consider important business costs but critics in the administration and Congress regard as tax breaks.

IPAA also is keeping an eye on hydraulic fracturing regulations being developed by BLM, possible additional listings under the Endangered Species Act that could threaten both onshore and offshore oil and gas development, EPA's proposed National Ambient Air Quality for Ozone, issues raised by the growing transportation of crude by rail, workplace safety regulations, and possible disclosure requirements as the US implements the Extractive Industries Transparency Initiative.

Russell said IPAA will continue to try to educate Congress and the White House about 25 regulatory issues affecting US E&P. "With lower prices, it's especially important to get the message out," he said.

Officials from the association visit the White House, EPA, and BLM frequently, according to Daniel T. Naatz, IPAA's vice-president of federal resources and political affairs. "We've been willing to talk to anybody, but it never seems to have an impact on regulations which have been prepared," he said. "Our comments are substantive and detailed. The question is what they are trying to achieve."

Fuller said IPAA is encouraged by Congress's new makeup now that Republicans hold the majority on both sides of the Capitol. "The GOP has framed an agenda which will be more favorable to energy, and help legislation and oversight," Fuller said. Senate Majority Leader Mitch McConnell (R-Ky.) apparently wants to move more bills and put committees back to work, he said.

"It's exciting in a sense because there will be legitimate decisions about weighty issues, be it energy policy and regulations or broader questions," Naatz said. "Agencies will need to be held accountable for what they are doing and explain why they're doing it. We're ready to have that conversation about energy policy and what's going on."

Lower crude prices

All this will take place against a backdrop of crude oil prices that fell by more than half in last year's second half. The US Energy Information Administration forecast in its Jan. 13 Short-Term Energy Outlook that Brent crude prices will average $58/bbl in 2015 and $75/bbl in 2016, with annual average West Texas Intermediate prices expected to be $3-4/bbl below Brent.

"It will take a while for production to follow the rig count down, but it's happening," Frederick Lawrence, IPAA's vice-president of economics and international affairs, said. "The second half will be an improving outlook into 2016, but the next few months will be hard. Volatile prices are going to be a whip-saw. Even companies which thought they saw their lows at $75/bbl in October are seeing it go to $40."

As many as 180,000 US upstream jobs could be lost in 2015 after 150,000 were added during the previous 3 years, Lawrence said. But he said conditions are different now than they were in 1985-86, when nearly all production was conventional onshore and offshore, because shale formation activity can be shut down and restarted more quickly.

"Small producers also came out of the 2008 recession with strong balance sheets so they can reduce their operations more easily," Lawrence said. "Companies like EOG Resources say they can produce at $40-50/bbl, high-grade their portfolios, and try to cut their service costs further." Those costs, which came down 10% during 2014, could be 20% lower than 2013 by the end of 2015, he said.

"Demand also isn't what it was," Lawrence said. "There also are wild cards like weather events, production resuming in places like Libya and Iraq, and sanctions possibly easing for Russia and Iran." Many producers also are reducing their capital budgets at this stage, rather than shutting in production, which incurs significant losses and major restart costs, he said.

"Everyone's trying to play the risk game," IPAA's economist said. "But a shale producer can make decisions more easily than a deepwater or conventional producer. Rigs can be redirected to better plays."