The Economic Consequences of Restrictions on Domestic Energy Exploration; Next Generation Biofuels; Devon Energy Reports 2009 Financial Results

America’s reliance on foreign energy will grow by 19 percent over the next 20 years, expanding the transfer of U.S. wealth to the Organization of Petroleum Exporting Countries (OPEC) by more than $600 billion, according to a report by the National Association of Regulatory Utility Commissioners.  The two-year study broadly examined the social, economic and environmental impacts of continued restrictions on developing America’s oil and gas resources.

“The study highlights the importance of developing our domestic petroleum resources in an environmentally responsible manner,” said American Trucking Associations Vice President Rich Moskowitz. “Continuing restrictions on the development of U.S. energy resources will adversely impact our economic well-being and our national security.”

The study predicts the economic results of maintaining current restrictions on accessing America’s federally owned onshore and offshore energy resources. The results, when compared with the effects that could be expected from a reasonable energy policy on federal energy resources, will include:

•Import costs for crude oil, petroleum products and natural gas will be $1.6 trillion higher;
•Imports from OPEC nations will be 4.1 billion barrels higher, resulting in increased payments to OPEC of $607 billion;
•U.S. production of crude oil will be 9.9 billion barrels lower;
•U.S. production of natural gas will be 46 trillion cubic feet lower;
•Energy-intensive industries will produce nearly 13 million fewer jobs;
•Housing starts will be 200,000 fewer;
•Annual average natural gas prices will be 17 percent higher;
•Annual average electricity prices will be 5 percent higher;
•Real disposable income will be a total of $2.34 trillion less;
•Energy costs to consumers will be $2.35 trillion higher;
•Gross Domestic Product will be $2.36 trillion lower.

The American Trucking Associations is a member of the Consumer Energy Alliance, which was among the public sector and private sector organizations that contributed energy experts’ information and analysis for the NARUC report.

The report was assembled by experts from the Science Applications International Corp. and the Gas Technology Institute and provides the most up-to-date assessment of America’s oil and natural gas resources. Utilizing the National Energy Modeling System, the study renders a quantitative summary of the jobs, revenue and number of housing starts that Americans should expect to surrender in the future under the restrictive energy policies currently in place.

To view the executive summary of the report, click here.

Next Generation Biofuels: Market Drivers, Growth Opportunities and Regulatory Change

Over 80% of the world’s primary energy supply is currently derived from coal, gas and oil (collectively known as ‘fossil fuels’), which are used to generate electricity, power, energy and heat for industrial, commercial, domestic and transportation purposes. The world’s dependence on crude oil for transportation is particularly marked, with the International Energy Agency (IEA) estimating that fuels from crude oil currently supply about 96% of the worldwide energy demand for transport purposes.

As the world’s population grows and developing countries look to expand their economies, this insatiable demand for fossil fuels is unlikely to show any sign of easing, with oil and gas accounting for 60% of the world’s increasing energy demand between now and 2030. Furthermore, with most significant reserves of fossil fuels unevenly distributed throughout the world, energy security is set to become an increasingly critical economic and political issue over the coming decades. Real or perceived disruptions to the global supply of fossil fuels — notably crude oil — are likely to grow in frequency and cause wild fluctuations in the price of energy, as they have done so in the past. However, one of the most pressing reasons for seeking alternative sources of energy and fuel lies in the form of ‘climate change’.

The combustion of fossil fuels releases carbon dioxide (CO2), a potent ‘greenhouse gas’ (GHG), which are considered by some to be responsible for ‘global warming’. According to the IEA, if no changes are made to the world’s existing energy economy, related emissions of CO2 will grow marginally faster than energy use, meaning that by 2030 global CO2 emissions will be more than 50% higher than today. Over two-thirds of that projected increase in emissions is expected to come from emerging economies, such as India, China — both of which are set to rely heavily on coal-based power stations to drive their rapidly developing economies.

The combination of biomass and biofuels accounted for around 26% of the world’s total renewable energy production in 2008. Second generation biofuels have been developed due to limitations of first generation biofuels, primarily that the resources used threatens food supplies. Second generation biofuels production processes include a variety of non-food crops such as waste biomass, the stalks of wheat, corn, wood and miscanthus. Second generation biofuels use biomass to liquid technology, such as cellulosic biofuels from non-food crops. Third generation biofuel primarily references fuel derived from algae. Algae fuel is not yet commercially available or viable due to cost constraints, but through various laboratory experiments promising results have been obtained. In 2008, the US Department of Energy noted that algae can produce 30 times more energy per acre than land crops such as soybeans.

North American Onshore Proved Reserves for Devon Energy at Record 2.6 Billion Boe; Drill-Bit Reserve Additions More than Double Record Production

Devon Energy Corporation reported that 2009 full-year and fourth-quarter financial results as well as its 2009 full-year oil and gas production from continuing operations has reached an all-time high. In addition, Devon reported record-high proved oil and natural gas reserves at December 31, 2009.

“2009 was a pivotal year for Devon as we began repositioning the company to focus entirely on our high-return, North American onshore natural gas and oil portfolio,” commented J. Larry Nichols, chairman and chief executive officer. “We grew North American onshore production by more than six percent in 2009 and replaced more than twice our production with the drill bit at very attractive costs. We expect to receive after-tax proceeds of $4.5 billion to $7.5 billion as we divest our offshore and international properties this year. This will further strengthen our rock-solid balance sheet and enable us to accelerate growth across our U.S. and Canadian asset base.”

In accordance with accounting standards, Devon’s year-end reserve reporting pertains to the company’s continuing operations, which include its Gulf of Mexico properties. Following is a discussion of proved reserves pertaining only to Devon’s North American onshore assets.

Devon increased North American onshore estimated proved reserves by 20 percent to a record 2,641 million oil-equivalent barrels (Boe) at December 31, 2009. The company added 669 million Boe to its North American onshore proved reserves from all sources. Costs incurred applicable to North American onshore properties were $3.3 billion.

Successful drilling (extensions, discoveries and performance revisions) accounted for 492 million Boe of North American onshore proved reserve additions. The company invested $3.2 billion of associated drill-bit capital during the year. Revisions related to changes in oil, natural gas and natural gas liquids prices increased 2009 North American onshore proved reserves by 176 million Boe.

North American onshore oil and gas production increased more than six percent to 220 million Boe in 2009. The reserve life index (proved reserves divided by annual production) for the North American onshore properties is approximately 12 years.

Proved developed reserves of 1,869 million Boe at December 31, 2009, represented 71 percent of total North American onshore proved reserves. Proved undeveloped reserves were 29 percent of the total. Year-end North American onshore proved reserves included 653 million barrels of crude oil, 9.4 trillion cubic feet of natural gas and 419 million barrels of natural gas liquids.

Related Links: IBISWorld industry reports

Oil Drilling & Gas Extraction in the U.S.

Global Oil and Gas Exploration and Production

Petroleum Refining in the U.S.

Rail Transportation in the U.S.

Natural Gas Distribution in the U.S.

Survey: Americans Underestimate Role of Crucial Economic Resources

A new survey conducted by the American Petroleum Institute finds that while Americans now recognize the United States will need more energy in the coming years, they continue to underestimate the amount of oil and natural gas that government experts predict will be needed to meet that demand. Conversely, respondents overestimate the role that renewable energy sources will play in meeting future demand, the amount of oil the U.S. imports from the Middle East, and oil and natural gas industry earnings.

According to market research firm IBISWorld, the US leads the world in petroleum refining output, with an emphasis on the processing of light, low sulfur crude oil. It has about 20% of the world’s crude oil distillation capacity and about 30% of the more complex cracking and reforming capacity.

The new administration and Congress are currently underway in pursuing energy and climate policies that will determine America’s economic competitiveness for years to come.

“Americans understand fundamentally that we need more energy to grow our economy but they continue to undervalue oil and natural gas in meeting expected demand,” said Jack Gerard, API’s president and CEO. “We stand ready to work with the White House and Congress on policies that encourage the development of America’s vast resources, which would strengthen our nation’s energy security, create new jobs and increase government revenues by trillions of dollars.”

“The American public wants to believe there is a silver bullet answer to our energy challenges despite what government experts predict,” said Jim Hoskins, senior vice president for Harris Interactive. “Americans have become more aware of how current policies limit increased domestic production but they also continue to subscribe to common, yet critical, misperceptions regarding how the industry operates and the energy we’ll need to meet growing demand.”

Comparing the results to last year’s survey, respondents showed a continued misunderstanding on key issues such as the significance of North American oil and natural gas resources, the number of people employed by the oil and natural gas industry in the U.S., and the amount of taxes the industry pays every year.

API commissioned the online research by Harris Interactive of 1,298 U.S. adults between April 30 and May 8, 2009. Results were compared to the previous two years’ responses. Among the survey’s key findings:

More Americans understand that U.S. energy demand will increase during the next 20 years, but they underestimate the vital role that fossil fuels will play in meeting demand.

While the U.S. Energy Information Administration (EIA) projects that U.S. energy demand will increase 9 percent during the next 20 years, only 5 percent of respondents chose the correct answer. The majority overestimated this number, believing that U.S. demand would increase 16 to 21 percent.

When asked what percent of global energy demand will be met by fossil fuels such as oil, natural gas and coal, according to government projections, only 10 percent of respondents answered correctly that fossil fuels will meet 85 percent of energy demand. This is the second consecutive year this number has dropped even though the EIA figure for future U.S. reliance on fossil fuels has risen by five percent since 2008.

Similarly, while the EIA projects that more than 55 percent of U.S. energy demand in 2030 will be met by oil and natural gas, only 16 percent of respondents chose this answer.

Those surveyed overestimate the amount of oil and natural gas supplied to the U.S. by the Persian Gulf countries and underestimate the amount that is supplied from North America.

According to the U.S. Department of Energy (DOE), 12 percent of the oil consumed last year in the U.S. came from the Persian Gulf countries. Only 7 percent of respondents chose correctly, while more than 40 percent of respondents believed that over 30 percent of our oil supply came from the Persian Gulf.

Fifty-three percent of respondents believed that Saudi Arabia was the largest U.S. supplier of imported crude oil. In fact, according to the DOE, Canada is the largest supplier of imported crude oil.

Only 5 percent of respondents knew that more than 73 percent of oil and natural gas consumed in the U.S. was produced in North America. This is down 3 percent from last year’s survey. A surprising 42 percent were under the misconception that the answer was less than 35 percent.

Rising Energy Demands Necessitate Capacity Additions in Oil and Gas Refineries

Oil and gas account for 41 percent of India’s energy consumption and there is unlikely to be any significant scaling down of dependence on these fuels in the next five to ten years.

New analysis from Frost & Sullivan, Strategic Analysis of Oil and Gas Sector in India, finds that the output of the Indian oil and gas sector was 184.3 million tonnes oil equivalent in 2008 and expects this to reach 339.6 million tonnes oil equivalent in 2015.

“To meet this considerable demand, the oil and gas sector is expanding its refining capacity to drive output and export of petroleum products,” says Frost & Sullivan Industry Analyst Siddhartha Saha. “However, this is likely to widen the gap between domestic demand and supply of crude oil.”

A substantial increase in the domestic supply of natural gas and reduced prices of liquefied natural gas (LNG) are likely to encourage gas consumption in power, fertilizer, city gas distribution, and other industrial segments. Owing to the rising consumption of oil and gas, the Government has framed favorable policies to promote exploration and production. This move has caused a quantum leap in domestic natural gas supply. Government policies have also supported the growth of export-oriented refining capacity in the country.

Natural and technological limitations in enhancing global oil production are likely to restrain supply from keeping pace with the demand. This, in turn, could lead to a continued increase in the base-level prices of crude oil.

“In India, the pricing of petroleum products and natural gas continues to be regulated by the government,” observes Saha. “Though international crude oil prices have come down in the short term, they are expected to rebound and rise in a sustained fashion in the long term.”

The oil and gas sector will have to strategize to deal with volatile prices on the supply side and government-regulated product prices in the coming years.

With margins under pressure, Indian refiners have begun to integrate with value-added products such as petrochemicals and invest in methods to improve distillate yields. Moreover, in response to the regulated product prices in the domestic market, the private sector refiners have moved to sell major shares of their products in the export market.

“As crude prices have increased, the spotlight is on widening the gross refining margins by up-grading heavy gas oils and vacuum residue to fuel products,” notes Saha. “To gain additional revenue, Indian refineries are also integrating horizontally to venture into the production of more value-added products.”

Strategic Analysis of Oil and Gas Sector in India is part of the Energy & Power Growth Partnership Services program, which also includes research in the following markets: APAC generator sets market, Chinese power plant market, European nuclear power sector, world alkaline battery market. All research services included in subscriptions provide detailed market opportunities and industry trends that have been evaluated following extensive interviews with market participants.

According to Platts, a leading global provider of energy and commodities information, China consumed 33.23 million metric tons of oil in May, up a strong 6% from the same month in 2008. The data means Chinese demand has shown a year-on-year increase for a second consecutive month, evidence that demand for fuel in the world’s second largest oil-consuming nation is in recovery. In April, Chinese oil demand rose for the first time in six months. However China’s own crude oil production slipped by more than 1% in May.

“Falling crude oil production in China means its rebounding demand is having a disproportionally large affect on international oil trading. China imported 17.09 million metric tons – about 4 million barrels a day of crude oil last month. That was the second highest month of crude oil imports into China, ever,” said Dave Ernsberger, senior editorial director for Asia at Platts.

According to industry market research firm IBISWorld, US crude oil production meets only about one-third of its oil requirements; the rest is imported. Despite overall growth, industry revenue is expected to slump by about 41% in 2009 –in response to much lower crude oil and natural gas prices. However industry performance is expected to gain ground during the outlook period in response to rising oil and gas prices and higher levels of output.