The Top Six Issues and Opportunities Facing the Oil and Gas Industry in 2013 The Energy Information Agency, in a recent report, stated that domestic crude oil production is projected to continue its steep rise due to improved production technologies especially in shale formations. An EIA official noted that the annual output increase in US crude production has experienced its largest rise since the beginning of US commercial oil extraction in 1859. In its report, the EIA indicates that oil imports are expected to plummet with gasoline consumption falling below earlier estimates, with greater use of clean energy and reduced energy imports. As for natural gas, the EIA reaches similar conclusions, forecasting “relatively low natural gas prices, facilitated by shale gas production, that will spur increased use in the industrial and electric power sectors, particularly over the next 15 years.” In the month preceding the EIA report, the International Energy Agency predicted that the U.S. would become the world’s largest oil producer prior to 2020, with North America becoming a net oil exporter by 2030. The fast-rising tide of oil and gas production has raised boats outside of the hydrocarbon industry. It has been estimated that this boom has led to substantial new investments in steel manufacturing, petrochemicals production and fertilizer fabrication. The amounts spent on shale extraction alone, including the acquisition of mineral leases and drilling, are estimated to be in the hundreds of billions of dollars. The Eagle Ford Shale in South Texas, for example, presently ranks as the largest single oil and gas development in the world measured by capital expenditures, transforming an otherwise moribund local economy. An energy consulting firm has released an analysis indicating that unconventional oil and gas production has created more than 500,000 new jobs in Texas and is predicting nearly a million new jobs by 2020. The overall stimulus to the U.S. economy of the shale revolution and lower oil and gas prices has been substantial. Geopolitically, the shale revolution is seen as giving the United States significant additional influence and options. Despite the favorability of these significant long term trends, the oil and gas industry would be wise to focus on the immediate term, and to consider the following major issues and opportunities in 2013: 1. Climate Change In his inaugural address, President Obama identified the immediate address of climate change and promoting sustainable energy as important goals for the country. Of course, the devil is in the details as to what policies government can advance to effect these objectives. EPA already has begun to focus on the regulation of greenhouse gases associated with oil and gas activities. A challenge for the oil and gas industry will be to show government decision-makers and the public that the expanded development of hydrocarbons is compatible with the goal of a cleaner, low-carbon environment, as well as the goal of so-called energy independence. 2. Oil Field Operations – Air and Water Pollution According to a recently published study, oil and gas operations in northeastern Colorado were significant contributors to ozone in the winter of 2011, accounting for half of smog-forming pollutants in the region. With the Obama Administration having made the reduction of green-house gases a high priority, EPA activities can be expected to take a more activist lead on emissions policy. To gain domestic and overseas favor for oilfield operations, the industry will need to redouble its efforts to show through word and deed that such operations are environmentally friendly, especially when compared to other current forms of energy sources, e.g. coal. 3. Water Use and Conservation The drought situation in Texas has attained sufficient severity that both parties in the state legislature are moving to invade the State’s “rainy day” reserve fund, an extraordinary proposition for Texas, to facilitate the development of a state-wide water plan. Coincident with the development of extraordinary water conservation measures, the EPA is in the midst of its multi-year hydraulic fracturing study which is examining the effect of such field operations on water quality. The industry’s continued reduction of its water-use footprint in operations and observation of good engineering practices, is an imperative to defend hydraulic fracturing from media and regulatory attacks. 4. Potentially overlapping regulatory environment for drilling and development of oil and gas reserves If 2012 is a harbinger for 2013 in terms of regulatory wrangling, the industry can expect to confront overlapping regulatory regimes and challenges at all levels of government, federal (multiple departments), state and local (counties and municipalities). 2013/2014 will likely define the federal government’s role in regulating hydraulic fracturing and other environmental impacts associated with shale development. Beyond the environmentalists’ siren song that hydraulic fracturing is a poison to the environment, there is also the clamor in urban areas for ordinances and regulations that are seen as necessary to protect property values and preserve residents’ domestic tranquility. 5. LNG Exports – The Extent to Which They Are Allowed The Energy Department released a report in December, 2012 that found LNG exports would help the U.S. economy. The DOE report says that exporting LNG would increase domestic natural gas prices, but the costs are more than offset by the benefits to the broader U.S. economy from the export revenues. The department is reported to be reviewing more than a dozen proposals to export gas to countries lacking a free-trade agreement with the United States, including big gas consumers like Japan. The report is not without its critics in Congress and manufacturers and other industrial users of natural gas in the private sector. The debate over whether to export the United States’ new bountiful supply of natural gas is dividing private industry groups that represent some of the nation’s biggest companies. In January, Dow Chemical Co. terminated its affiliation with the National Association of Manufacturers over what the company says is the group’s failure to take a “neutral” position on a proposal to allow U.S. exports of liquefied natural gas. Dow accused the group in a January 2013 letter of backing unrestricted LNG exports and “overtly and unapologetically [supporting] the interests of one element of its membership over another.” Dow supports a “balanced” export policy that provides incentives for gas production, protects manufacturers’ competitive advantage and allows oil and gas producers to enter foreign gas markets. “The unfettered export of natural gas is widely understood to have serious implications for the cost and volatility of manufacturing feedstock prices,” wrote a spokesperson for Dow. “NAM’s decision therefore places the views of oil and gas producers above the interests of its manufacturer members.” The confluence of Congressional and manufacturing sector criticisms of the DOE Report means that the natural gas industry will face a serious challenge in efforts to expand its markets which critics see as inimical to maintaining stable (i.e. relatively low) prices. 6. Tax Reform / Energy Tax Policy The seemingly endless “fiscal cliff” discussions will spotlight the oil and gas industry’s current federal tax treatment for close scrutiny. Corporate tax reform in 2013 may encompass adjustments to the treatment of, e.g., intangible drilling costs (IDCs), depletion allowance and geological and geophysical amortization. Such tax adjustments, viewed in isolation without consideration of other variables, may bode for a negative impact on equities and investment/reinvestment plans. ~Crude Genuine~
Posted on: Tue, 23 Jul 2013 19:44:14 +0000
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