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Push-me/Pull-you: Post-Election Energy Policies

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I’ve seen numerous commentaries on the energy implications of President Obama’s narrow, 51%/49%  victory. One of the most intriguing of these, from Reuters, concerned the prospects for exporting a portion of the growing output of natural gas produced from US shale deposits.  This issue doesn’t only affect gas drillers and their residential and industrial customers, but also developers of renewable energy projects, because of the way that gas and renewables compete in electricity markets.  As much as the President’s reelection, the failure of Republicans to capture control of the US Senate might turn out to be a key factor in determining the fate of potential gas exports, and by extension the environment within which renewables like wind and solar power must compete.

A variety of energy issues has been in limbo for months, pending the outcome of Tuesday’s election.  That includes approval of the Keystone XL crude oil pipeline from Canada, which might have gotten a favorable nudge as a result of Senate wins by pro-pipeline Democrats in North Dakota and Montana.  Environmentalists are committed to blocking the pipeline, so the President must soon choose which part of his winning coalition he will disappoint.  By comparison, the question of natural gas exports has received much less attention in the media, although it’s been discussed extensively within energy and manufacturing circles.  The likely incoming chairman of the Senate Energy and Natural Resources Committee, Ron Wyden (D-OR), appears to have strong views on the subject.   

If Senator Wyden does replace the outgoing chairman, Senator Bingaman (D-NM), as expected, this would represent a shift in constituencies from a state with significant oil and gas production to one with essentially none.  Senator Wyden thus brings mainly an end-user perspective to his Energy and Natural Resources role, and from that standpoint his concern about the potential price impact of gas exports, whether in the form of LNG or otherwise, is understandable, although I would argue it is also short-sighted and potentially detrimental to renewable energy, which he strongly supports.

On the surface, restrictions on the export of US gas should result in lower domestic natural gas prices than if large quantities of gas were shipped offshore.  After all, low US natural gas prices, compared to those in Europe and Asia, are the main driver behind the desire to build export facilities, such as the Sabine Pass project of Cheniere Energy.  Natural gas is cheaper in the US than elsewhere for several reasons, including the high and growing output from shale gas resources, as well as the epic disconnect between the natural gas price and crude oil prices, which are the basis for most international LNG contracts. US gas at the wellhead is currently trading for the oil equivalent of $21 per barrel, compared to UK Brent Crude at $107 per barrel.  The extent to which exports might increase domestic prices is a matter of much speculation and study, and I wouldn’t venture a guess.  However, we can’t just look at demand in gauging the impact of export restrictions.

The efficacy of holding down US prices by keeping more gas here also depends on the response of producers.  If legislators or regulators turn the US gas market into a capped bottle, why would producers be content to supply steadily increasing quantities of gas at prices that don’t provide them an attractive return?  To some degree the low prices we’ve seen this year were the result of the combination of a weak economy and a supply glut created by contractual commitments on the part of drillers to develop gas leases at a specified pace.  My understanding is that most such commitments have lapsed, and that a significant proportion of current gas supply is coming from wells that depend on the economics of their liquids output (crude oil and gas liquids), with the associated natural gas effectively a byproduct.  It’s not clear how rapidly gas production can continue to grow without natural gas prices that make gas-only wells economically attractive.  So a US gas market with no export outlets would likely produce less gas in the long run, and that would constrain opportunities to use our abundant gas resources to support new industries, displace oil from transportation, and further reduce the use of coal in power generation.

Moreover, keeping a lid on the US gas market would compound the obstacles for renewable sources of electricity.  Wind power developers and turbine manufacturers now face the expiration of the Wind Production Tax Credit (PTC).  Even if it is extended, the output of wind farms competes with the output of gas turbines, while also relying on gas to provide a back-up for the intermittent output of wind and solar power.  The cheaper the gas, the tougher it will be for renewables to make a profit. Market competition with gas will become an even bigger issue for renewables as they expand beyond the capacity of a cash-strapped federal government to continue to subsidize them.  The one-year extension of the PTC under consideration could cost as much as $12 billion, an annual price tag that would only grow as renewables scale up–as they must if they are going to matter.

Navigating the complexities of allowing or restricting natural gas exports, and balancing the various constituencies involved, could provide an early test of the administration’s commitment to an all-of-the-above energy strategy.  That’s because “all of the above”–if not merely a slogan–implies more than just producing energy from a variety of sources.  It also entails competition among all these sources within a market in which some sectors of demand are declining, others growing, and new ones–including exports–are appearing all the time.  Pushing back on one part of this market will have large consequences in other parts, and regulators could soon be overwhelmed by unintended consequences. 

Image: Elections via Shutterstock

Geoffrey Styles's picture

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John Miller's picture
John Miller on Nov 9, 2012 7:06 pm GMT

Geoffrey, What has really changed with the election?  We still have the President’s same ‘all-the-above’ energy policy that appears to contain more doublespeak rhetoric towards oil & gas policies than constructive actions, a clean energy policy that continues to favor just increasing renewables production without finite future value-added performance targets or economic impact considerations, and an increasingly aggressive EPA that has purposely delayed many regulatory actions until after the election.  Now that the Administration is no longer constrained by concerns for achieving a second term, will we experience a new bipartisan approach to our country’s most impactful issues similar to President Clinton’s second term, or will we continue to experience the first term’s declared strategy of ‘doubling down’ with even stronger partisan approach towards most government policies?

Due to the EPA’s likely strategy of increasing the regulatory actions to more rapidly shutdown coal power generation capacity, the U.S. will increaseingly require all current and possible future domestic natural gas production.  Yes, we currently have an excess of supply and possibly exporting some domestic production is a free market approach to rebalancing supply and demand.  However, depending on the EPA's success in more rapidly shutting down coal power, even if some reasonable level of exports were allowed in the short term, the rapidly increasing need for U.S. natural gas power generation will increase domestic consumption (and prices), making exports less attractive.  The apparent evolving current Administration’s ‘isolationism’ economic policies, in the name of domestic jobs or energy independence, may make the probability of Federal Agencies approving any energy exports in the near future relatively small.  Do not be surprised if the EPA also successfully constrains hydraulic fracturing in the near future.  This action could also rebalance (reduce supply and increase the cost/price) of future U.S. natural gas markets.

Geoffrey Styles's picture
Geoffrey Styles on Nov 9, 2012 8:21 pm GMT

John,

As you note, a number of potential uses for future shale gas output are already queued up, including the possibility of replacing 100% of coal-fired power generation.  Putting numbers to that, on a rolling 12-month basis through August coal is still generating about 1.5 billion MWh of electricity annually in the US.  Replacing that would require increasing gas consumption for power generation by about 10 TCF per year over last year's 7.6 TCF (or 31% of US gas consumption in 2011.)  Between 2005 and 2011 dry gas production increased by 5 TCF/yr, as the shale revolution was getting started.  There's clearly more upward potential, though I haven't seen any good estimates of an upper limit.  Could we reach 33 TCF/yr (90 BCF/d)?  What $/MCF price would that require?

In any case, I don't think it's realistic that 100% of coal would be backed out by gas, even with tighter EPA regulations of power plants.  As more coal is displaced by gas, its price falls, and at some level utilities can afford to add the hardware necessary to meet the new specs, unless all the displaced coal is exported to Europe and Asia.  Hmm, perhaps that's the scenario: We export coal instead of LNG, and Europe's emissions goals shift out of reach.  Still, I tend to see the extra gas going in many different directions, rather than just one, including manufacturing (steel, petrochemicals, fertilizer, etc.), power generation, transportation and exports, if allowed. 

John Miller's picture
John Miller on Nov 10, 2012 5:18 pm GMT

Geoffrey, Yes, it would be a stretch to displace all coal with natural gas.  When I evaluated displacing coal with wind and natural gas (Re. http://theenergycollective.com/jemillerep/98281/costs-replace-us-coal-power-clean-energy) natural gas consumption directionally doubled.

The amount of surviving coal plants will be relative to the cost of alternatives including natural gas and nuclear.  Very rough market analysis indicates we could easily experience natural gas markets north of $10/KSCF again if consumption doubled and supply tightness returned to levels we experienced 2005/2008.

Asia will likely be the most promising market for coal exports, particularly as domestic demand continues to drop and the market price follows.  This assumes that the local environmental groups are not successful in blocking ports-of-export on the West Coast.  In the meantime I agree that all U.S. end-use sectors will continue to enjoy relatively cheap natural gas.

John Miller's picture
John Miller on Nov 10, 2012 5:14 pm GMT

Danny, this action should not be a surprise.  Despite the Administration’s election year ‘all-of-the-above’ rhetoric, actual actions that tangibly contributed to increased domestic oil & gas production during the President’s first term were either relatively insignificant or fabricated (Re. http://theenergycollective.com/jemillerep/135851/what-are-final-obama-and-romney-energy-plan-changes).  Many decisions critical to U.S. energy supply, consumer costs and security have been delayed until after the election.  The decision to close off access to the 1.6 million acres of federal land to oil production as you reference may be just the beginning.  We will likely see renewed efforts to block Alaskan, Gulf of Mexico and nearly all other off-shore development.  And, the probability of the Administration ever approving the cross-border Keystone XL pipeline is highly doubtful.

In the meantime, China is applauding the Administration’s actions that will punish the U.S. economy and consumers, and further benefit mainland China and its leadership.  Blocking the Keystone XL makes China the only viable option for our largest and most important trade partner, Canada, to develop their tar sands oil reserves and help grow their economy.  China will also be developing new offshore Gulf of Mexico oil production with Cuba just south of the Florida Straits and adjacent U.S. territorial Gulf oil reserves.  We will watch China develop Gulf oil off our shores, while the Federal Government continues to deny access to U.S. oil companies and the value to our national interests.   

Kevin O'Rourke's picture
Kevin O'Rourke on Nov 12, 2012 7:52 pm GMT

To clarify a point in the article, the wind energy production tax credit (PTC) is tax relief – not a handout. Unless one assumes that all money earned in the private sector belongs to the government, a tax credit is different from a government subsidy or a loan guarantee. A tax credit simply leaves more money in private hands.

It should also be noted that wind energy fared well in the Nov. 6th elections, as voters returned supporters of the wind energy Production Tax Credit (PTC) from both parties to Congress and allowed the current administration’s support for wind energy to continue uninterrupted.

Several outspoken Republican wind champions were re-elected, including House of Representatives supporters Dave Reichert (R-WA), Steve King (R-IA) and Tom Latham (R-IA), and Senator Dean Heller (R-NV).

In Maine, Independent Angus King fended off attacks on his role as wind project developer to win the open Senate seat.

Swing states with numerous wind farms and wind factories went for President Obama, whose campaign took the position that the wind energy PTC should be extended.

Given Obama’s strong support for the PTC, his win strengthens the industry’s position in the lame duck session and during tax reform discussions.

A PTC extension is a necessary component of an “all of the above” energy plan to ensure a diverse mix of energy sources to protect our national security and our economy.

Geoffrey Styles's picture
Geoffrey Styles on Nov 13, 2012 1:40 pm GMT

Willem,

Cheniere's Sabine Pass project involves adding liquefaction to an existing import terminal that already has the other infrastructure you cite.  As for the global market into which they and others propose exporting US LNG, it is quite a bit more developed than you credit.  Japan is the biggest customer, but by no means the only one. There's even something of a spot market. This report from the International Group of Liquefied Natural Gas Importers provides a good overview, including a helpful flow map: http://www.giignl.org/fileadmin/user_upload/pdf/A_PUBLIC_INFORMATION/LNG_Industry/GIIGNL_The_LNG_Industry_2011.pdf

That doesn't mean that the folks building export capacity wouldn't be taking on some risks re long-term price and availability.

Geoffrey Styles's picture
Geoffrey Styles on Nov 13, 2012 8:53 pm GMT

Kevin,

Let's start by agreeing that the election outcome improved prospects for a PTC extension.  From my perspective, I hope that it is structured as a final phaseout, rather than simply changing the expiration date of the existing policy.  After all, this tax benefit has been in place for 20 years, off and on, in its present form, while the wind industry has matured.  Instead of ratcheting down as the cost of wind power has fallen, it has ratcheted up with inflation.  

Moreover, your assertion that the PTC is "tax relief--not a handout" is undermined by the fact that many wind developers haven't generated enough profits to take advantage of the full credit based on their own results, and have turned to either the "tax equity" market (banks and other investors who buy tax credits at a discount to offset other business profits) or the government, in the form of the Treasury cash grants in lieu of tax credits that were part of the stimulus.  The net result of such mechanisms reduces federal tax revenue by more than the simple functioning of the PTC alone would.  In other words, in many cases the US government receives less tax revenue than it would if the wind industry didn't exist. To that extent, it is a handout.  Contrast this with the much-criticized tax benefits for the oil and gas industry, which even after the application of the Sec. 199 deduction and various other deductions and credits most leaves oil & gas companies with very substantial tax liabilities and effective tax rates often higher than other industries.  What is the effective tax rate on wind developers after factoring in the PTC? 

Geoffrey Styles's picture
Geoffrey Styles on Nov 13, 2012 3:07 pm GMT

Willem,

I'm just curious how you'd achieve that without the kind of industrial policy that many of your comments elsewhere on the site seem to oppose. 

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