TREND: U.S., Energy Exporter

For many, the phrase “U.S. energy security” implies “energy imports.” The energy policy horizon for the past 40 years has been dominated by an overhanging fear that this country is importing too much oil from unstable, unfriendly lands. The frequently misleading term “energy independence” has long dominated much of the discussion, and politics, of U.S. energy policy.

This conventional view, of course, is an over-simplification. The country has long possessed enormous domestic energy resources. The U.S. has long been, in a common cliché, the “Saudi Arabia of coal.” And most U.S. oil imports come from nearby places such as Canada, Venezuela, and Mexico, not from Arab lands.

The nation possesses lots of useable energy stuff: uranium, running water, hot rocks, natural gas and, yes, crude oil. While most people don’t know it, per EIA data the U.S. is the world’s third largest oil producer, at 9.7 million barrels per day, behind only Saudi Arabia (10.5 mb/d) and Russia (10.1 mb/d). But we still import a lot of oil, and the oil is expensive, so our balance of payments—the value of what we export compared to the value of what we import—tilts to the negative.

For a number of reasons, the energy trade balance recently has been shifting, and rather dramatically. The U.S. is now exporting substantial amounts of energy, these exports are growing, and new markets may be opening up. And it’s all about fossil fuels, reviled in some quarters, but still the backbone of energy markets and national economies worldwide.

The new story starts with crude oil. Despite the dire warnings of a school of thought called “peak oil,” there is scant evidence that the worldwide supply of crude oil is falling. Despite political turmoil in areas such as Syria, the world now enjoys more oil capacity than demand, so crude prices have been falling. At the same time, driven partly by a slow economy, U.S. consumption has declined, according to EIA figures, while production has increased, thus net crude imports have also declined, from 60% of total consumption to about 45%.

At the same time, U.S. demand for gasoline, made from that crude, has also fallen, leading to a surplus of refined petroleum products. As ExxonMobil’s Ken Cohen has pointed out U.S. refiners have chosen export their surplus rather than ramp down production at their U.S. plants. So, for the first time since 1949, the U.S. has become a net exporter of petroleum products. 

A significant part of the changing picture for crude oil and petroleum products in the U.S. is oil field technology. The combination of horizontal well drilling and hydraulic fracturing has opened a vast new geological resource, tight shale formations. Exploiting these new technologies has led to major new sources of crude oil, particularly from North Dakota and Texas, and vast new supplies of natural gas, from those two areas and Appalachia’s Marcellus shale formation.

The U.S. has now increased its crude oil production and seen a boom in natural gas, so much so that natural gas prices have declined to inflation-adjusted levels never seen before. U.S. gas producers, seeing domestic storage filling and prices outside the U.S. going up, are looking abroad for markets. Less than a decade ago, respected energy analysts such as Dan Yergin at IHS CERA were predicting a vast bull market for U.S. imports of liquefied methane. Firms seeking approval for LNG import terminals were lined up at the Federal Energy Regulatory Commission seeking approval, and many faced storms of controversy at home as local citizens opposed locating import terminals in their backyards.

Now, FERC is considering plans to convert existing U.S. LNG import terminals into export hubs, as U.S. gas companies face a glut of supply and a looming shorting of storage. FERC earlier this year approved Cheniere Energy’s proposal to convert its planned Sabine, La., import terminal into an exporter. Yergin recently commented in POWER magazine, “Five years ago the debate was about how much LNG we would import. Now it’s about how much will we export!”

The U.S. has long exported LNG from Alaska to Japan, but that has been a niche business related to the inability to move Alaska’s plentiful gas, a byproduct of the oil business, to the lower 48. The current issue of GAS POWER has an excellent article detailing plans for much larger U.S. LNG exports.  

Driving this is a specific economic circumstance for gas. Unlike crude oil, there is no worldwide price for natural gas. Instead, there are regional prices, which vary greatly around the world. In Japan, for example, natural gas fetches prices 800% higher than in the U.S. Japan’s retreat from nuclear power has turned gas into the swing fuel for electric generation, driving up what Japanese businesses are willing to pay.

It should not be a surprise that the prospect of selling U.S. gas to foreign countries has produced political controversy. Congressman and energy policy gadfly Ed Markey, a Massachusetts Democrat who cut his political eyeteeth on opposition to the Seabrook nuclear plant 40 years ago, wrote recently, “Exporting natural gas is a clear threat to affordable American industry, from electricity to agriculture and manufacturing. The oil-and-gas industry’s plans could result in 18 percent of our domestic natural-gas supply being exported.” Markey’s district includes what was supposed to be a large LNG import terminal, which local citizens had vigorously opposed at the FERC and elsewhere.

Markey has joined with Sen. Ron Wyden, an Oregon Democrat, to ask the Energy Department to slow down approvals for new LNG or coal terminals. (The DOE must approve all export licenses.) As a result, says DOE, there will be a delay of at least several months in approving any additional LNG export applications while the energy agency completes a study of the impact of exports on the U.S. market. Wyden is in line to become chairman of the Senate Energy and Natural Resources Committee should the Democrats retain control of the Senate following this year’s federal elections.

Coal, the fossil fuel that the U.S. possesses in far greater amounts than anywhere else in the world, is also seeing an export surge. U.S. consumption is slowing, driven by the rise of natural gas and the arrival of new rules on power plant emissions. But U.S. exports are increasing and some in the coal industry see markets abroad as the salvation of their industry.

Predictably, the possibility of the coal industry prospering from selling abroad has also spurred considerable criticism, primarily from environmental activists and their allies. Sen. Wyden, with a home base in Portland, has also led opposition in Congress to increased coal exports. Some exporters have been eying Portland as an attractive site for a coal export terminal for the Asian market. 

The U.S. has always been a substantial coal exporter, and the industry experienced a boom in coal exports in the 1980s, driven largely by a weak U.S. dollar that made the coal attractive on world markets. The U.S. exported 50 million tons of coal in 2005; by 2011, the figure had more than doubled to 107 million tons out of total production of a billion tons for the year. However, the U.S. is still well behind Australia, Indonesia, Russia, Columbia, and South Africa as a long-term exporter.

Most of the U.S. coal flowing out of the country is a specialty product whose sales are unrelated to reduced burning of coal to generate U.S. electricity. The dominant export coal from the U.S. is metallurgical coal, used in making steel. Met coal is used to make coke, needed to reduce ore to metallic iron, which is then turned into steel in integrated steel mills. Of the 107 million tons of coal exported last year, 70 million were met coal, a 24% increase over 2010, according to the EIA. Only certain types of coal are useful in the steel industry, and only the U.S., Australia and Canada have substantial supplies of met coal. Subbituminous coal—and that means Powder River Basin coal—isn’t suitable for metallurgical use.

The boom in U.S. coal exports is driven far more by China’s growing steel industry than by decline in burning it in U.S. power plants. Recently, China’s economy has slowed, and the steel industry is moving to new locations, including the U.S. That suggests the press accounts suggesting that U.S. coal exports could soak up the domestic decline for coal are hyperbolic, although coal will continue to be a substantial U.S. export commodity.

But increased U.S. coal exports face stiff competition from producers closer to growing Asian markets, particularly Australia and Indonesia, which are already established sellers in the Asian market. Also, Coal Age magazine reports that minerals giant Rio Tinto has recently begun exporting coal from Mozambique on Africa’s east coast, and is upgrading the port of Beira on the Indian Ocean to serve the same markets. So winning big new markets for U.S. steam coal is likely to prove very difficult.

—Kennedy Maize is MANAGING POWER’S executive editor.