December 2012, Vol. 239 No. 12

From the Burner Tip

National Election Brings Time For Critical Energy Decisions

Carol Freedenthal, Contributing Editor

Decision-making in important national areas and politics mix like oil and water! Got rid of the politics for the time being – not really, but it is not as pertinent – so it is decision-making time for the government in the energy sector. Big decisions are waiting to be made in this very important part of the national agenda.

Hot on the agenda for decisions that were delayed so they would not impact the elections are many and varied. Their outcome is critical to the energy business itself as well as the national economy and security. Some of the decisions to be made are based on regulation, some on government policy. Both are vital to the country’s economy and wealth.

One of the biggest decisions in policy-making is the question of the Keystone XL pipeline for bringing additional tar sand-derived crude oil from Canada to the U.S. for refining and marketing. The second part of the original Keystone pipeline, the new pipeline would start in Canada, cross into the U.S., passing through the middle of the country before ending up in the Gulf Coast for refining and distribution.

Keystone 1 was completed a few years ago and brings Canadian tar sand crude to the midcontinent U.S. crude storage areas. Plans for expansion of this pipeline are part of Keystone XL and would bring crude from both pipelines to Gulf refineries. Keystone XL requires Department of State approval since it starts in and crosses the U.S. border. The extension of the existing pipeline to the refineries only requires Energy of Department and state approvals. The administration endorsed this extension last year and work has already begun.

Crude production from Canadian tar sands has produced loud objections from both sides of the border. Environmentalists claim the crude production operations are damaging; they feel the crude produced is more contaminating and damaging to the environment than crude produced from below the earth’s upper crust. Needless to say, these same groups feel any fossil fuel is harmful and use should be restricted or stopped. Even though there are no economically available and abundant replacements, they want all fossil fuels banned.

The environmentalists also are worried that shipping the fuel from Canada into the U.S. and down to Texas opens a big potential for spills and contamination of groundwater, farmland, etc. They feel the crude produced from tar sands is so “dirty” and hazardous that it is folly to want to ship it. They fail to recognize the safety features built into the pipelines when handling more difficult products. More “dangerous” and dirty crude is being brought into the U.S. everyday through the Gulf of Mexico when Venezuelan heavy crudes are shipped to the Gulf Coast for refining.

After years of review and analysis and an approval by the Environmental Protection Agency (EPA), the administration in late 2011 rejected approval of the import certificate for the tar-sand crude pipeline. Supposedly, this was to prevent alienation of environmentalists with the November elections looming. Now is the time for a positive decision.

Not only will it help meet the U.S. desire to be closer to oil independence but it has many economic benefits. Building Keystone XL will immediately help the employment situation and open up new funds for the U.S. and Canada. The environmentalists have mobilized to stop approval of the pipeline and making a positive decision questionable,

Numerous environmental groups have even tried to stop the already started expansion from the midcontinent to the Gulf Coast extension of Keystone 1. They have targeted the pipeline construction across Texas by taking residence in trees to be removed for the pipeline placement and chaining themselves to construction equipment to stop building the new pipeline.

While the environmentalists had such an important role as voters in the elections to stop the decision, there may be other factors keeping the administration from accepting the Keystone XL project. Now after the elections, that pressure is gone but whether the administration will go with Keystone XL remains uncertain because there may be other reasons involved in the decision-making. Regardless of the election rhetoric to make the U.S. more oil independent, the green energy/anti-fossil fuel forces may prevail.

Equally as important as the Keystone project is the policy decision to be made whether to allow U.S. natural gas producers to export the gas as liquefied natural gas (LNG) to Europe and Asia. Natural gas prices dropped very low during summer and fall because of excess supplies produced from the shale reservoirs.

Demand for natural gas for the year is good but the supply is way over current needs. Natural gas prices in Europe and Asia are running five to 10 times domestic prices. Further, many LNG-receiving depots were built in the U.S. during the last decade when gas supply looked short of expected demand. These can be converted to export facilities with relatively small capital requirements and U.S. producers can share in international markets.

The policy question is, should gas exports be allowed, as it will most likely escalate gas prices – even if modestly? The government said it would make a decision earlier this year based on its analysis of potential price increases but then postponed the decision until after the elections because of the worry over backlash from domestic manufacturers and consumers who were enjoying the low-priced gas.

Between the low-priced advocates and environmentalists who dislike the new natural gas production methods, approval is questionable. The expanded markets for exporting LNG are needed to keep natural gas production escalating but its importance to the administration is unknown. The administration has mentioned the need for the additional gas supplies as part of its program to lower coal consumption for electric generation.

Another issue requiring a decision concerns regulation of energy systems such as coal for electric generation, natural gas production methods from shale reservoirs, and the use of government and offshore areas for continued oil and gas exploration and production.

The administration has previously stated it wanted to reduce the role of coal in the nation’s electric generation. Coal amounts to slightly more than 50% of the fuel used for generation mainly because of economics and availability. Its liability is largely the amounts of pollutants coming from the combustion and handling of the waste products.

The administration sought to get Congress to take action to reduce coal’s use but when this failed, the EPA began stricter enforcement on coal use, especially putting stricter limits on mercury released in the combustion. Numerous coal-generating companies have taken or threatened court action to stop the EPA.

The EPA agreed to wait until after the elections to continue its enforcement campaign. Full enforcement means the end of coal for widespread use in electric generation and the end of building coal-generating facilities. Coal, with the tremendous resources in this country, will be out completely. What will be done next is the decision to be made.

Likewise, the regulatory agencies as well as some states still have to make and enforce new rules impacting natural gas production from shale reservoirs. Again, a moratorium was made because of the elections and the fear of hurting certain areas where new gas production from shale had added so much to the fuel availability and economics in the area. Additional further testing of production and fracking methods have shown little to worry about environmentally, but the environmentalists’ concerns are still targeting for stricter rules.

Tightening down could go either way. Tighter rules could hurt production which in turn would impact the substitution of natural gas for the coal that might be eliminated by further restrictions. The interactions make it difficult to forecast what will happen.

The last major area where final decisions are needed is calling for additional action to open up more government properties for oil and gas exploration and production. During the campaign reference was made to increased oil and gas production, but this was all from private lands owned by the operators. There are many government properties where oil and gas production is possible if opened up. Again, environmental influence plays a big role and the direction the government will take is open to speculation.

Decisions, decisions – now is the time to make them. Wait too long and another election cycle will be here – mid-term elections for House and Senate are only in two years away.

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