US edges closer to new energy policy
The recent power crisis in California has raised American awareness of the situation
and the Bush administration seems to be more committed to the problem
Financial Times, April 30
By DAVID BUCHAN
The US is striving towards some kind of energy policy. When it eventually gets one, the impact on the rest of the world will be considerable.
The long-term health of the world's biggest economy, depends on resolution of its domestic energy problems. It also has an impact on the market and climate generally as the world's biggest importer of oil and emitter of greenhouse gases.
The US is also home to the world's largest private energy sector, but also has a government prone to use energy as a weapon of foreign policy. Through sanctions, Washington has kept its own companies out of certain oil-producing countries and tried to keep others out too.
The only absolutely clear thing about the Bush administration's national energy policy is that it wants one. That itself is a change. Like governments in other industrialised countries, Washington has steadily retreated from the energy sector.
It has moved from tight administration (fixing natural gas prices, for example) to loose regulation (shared, in electricity, with states and local governments).
The US has a Strategic Petroleum Reserve, created after the 1970s oil shocks, and actually used it last year. In extremis, the US is also willing to go to war for oil, as it showed in the Gulf conflict 10 years ago.
But the general sentiment was that the marketplace would provide a solution, and that energy problems, like bad weather and economic cycles to which they are related, could be relied on to fade away.
This complacency has been blown away by the California power crisis, last year's run-up in world oil prices (partly due to US gasoline and heating oil shortages) and the arrival in the White House of a president and vice-president with a background in Texan oil.
The Texas-based oil and gas industry tends to see the crisis as primarily one of supply. In the past 20 years, according to the American Petroleum Institute, US oil output has fallen from 8.57m barrels a day to 5.84m b/d.
This is despite the fact that companies now drill deeper (to an average of 6,105 feet, compared to 4,512 feet in 1981), cheaper (average well cost of Dollars 769,000, compared with Dollars 855,000 in real terms in 1981) and better (a 80.3 per cent success ratio, compared with 69.6 per cent in 1981).
During the same period, imports, both crude and refined product, have risen from 6m b/d to just over 11m b/d.
Natural gas output has not fallen off to the same degree. But nor, in a sense, can it. Environmental factors have driven up demand for gas faster than for oil. Unlike oil, it cannot be imported by sea, except in the liquefied form that still accounts for only 1 per cent of US gas consumption.
After the 1998-99 trough in activity, companies, spurred on by higher gas prices, are now pressing every available rig into service for drilling in the US and Canada. But they are having to run hard just to stay in place.
Mark Pappa, Houston-based chief executive of EOG, formerly Enron Oil and Gas and now one of the most active drillers in North America, explains why. "We are now getting gas out of the ground faster than we can find it, because technology in accelerated extraction is advancing faster than in seismology," he says.
As a result, the rate at which production declines as a share of the base is rising - from an average annual decline rate of 16 per cent in 1990 to 23 per cent in 1999. "In the Gulf of Mexico, decline rates can go up to 40 per cent a year," says Mr Pappa.
So the industry is eyeing federal land. The federal government owns one-third of US land, but where, 20 years ago, 75 per cent of this was available for drilling leases, now only 17 per cent is.
The industry hopes, with reason, that the Bush administration will reverse this trend. However, this will not be easy.
The administration's plan to open up part of the Arctic National Wildlife Refuge (ANWR) to drilling has stirred strong opposition. There are obstacles elsewhere, too.
While the federal government owns and could, in theory, lease the entire outer continental shelf for drilling, in practice California blocks exploitation of the Pacific, while Florida, even under Governor Jeb Bush, the president's brother, insists on keeping the drillers away from both its coasts.
Companies would also like to make fuller use of what leases they have, says John Seitz, president of Anadarko. His company, currently North America's most active driller on 21m acres, is doubling operations in the Rockies, but often has to dismantle rigs temporarily during the wildlife breeding and tourist seasons.
If access to resources is a problem, so is the infrastructure to get it to market.
A new report, produced jointly by the Baker Institute in Houston and the Council on Foreign Relations in New York, points out how deregulation was initially smoothed by "surplus capacities along the entire energy chain, accumulated in the days of government-subsidised industry and falling demand".
The excess capacity existed in refineries, tankers, pipelines, rigs, and, of course, in power generation. It allowed "expansion of energy use without significantly affecting underlying costs," says the report.
The surplus capacity has largely vanished under the impact of deregulation, the accompanying price volatility that has made new investment risky and quite separate pressures from environmental regulation.
Take oil refineries. Twenty years ago, the US had 315 of them with a combined capacity of 18.6m b/d and overall utilisation of 68.6 per cent. Last year, the country had 155 refineries with a 16.5m b/d capacity that was 92.6 per cent used.
It is the same story with the nuclear reactors that provide 20 per cent of US electricity. Not a single new nuclear plant permit has been issued since 1979, the year of the Three Mile Island accident.
But re-regulation is to blame for another handicap: the proliferation of regional gasoline standards, complicating refining and logistic problems and frequently causing local shortages and prices spikes.
A single standard was never going to suffice in so large a country with, for instance, mile-high Denver requiring a less volatile fuel than low-lying Houston.
But states and cities have increasingly used the 1990 Clean Air Act and the replacement of lead in fuel to demand that the oil companies provide them with differing cocktails of gasoline and diesel to suit their environmental needs. The upshot is that the oil companies are now asked to provide more than 100 different fuels.
California, the north-east and the upper mid-west require gasoline reformulated to be more oxygenated and less smelly; Atlanta demands a lower sulphur and less evaporative fuel than the rest of Georgia; and garages in the two halves of the city of St Louis (because they are in two different states) have to sell different types of gasoline.
The standards are unenforceable in the sense that drivers cannot be confined to a certain zone simply by virtue of what they carry in their tank. But this has not lessened local authorities' enthusiasm for them.
In this area, as in that of electricity infrastructure, it is hard to see what the Bush administration can do to prevent such balkanisation without riding rough-shod over states' rights.
Equally difficult, but even more pressing is to forge a single electricity transmission network to carry the huge amounts of power that are being traded across the country by commodity energy brokers, such as Enron and Dynegy. The federal authorities have slender means at their disposal.
While it has sole authority over the natural gas trade and network, the Federal Energy Regulatory Commission (Ferc) has to share supervision of electricity trade with states which themselves have sole power to rule on the siting of power plants and lines.
Deregulation has made the latter task harder. In the days of local monopolies, people knew that at least a power plant - however ugly - in their backyard would be serving their needs. But in today's world of competitive long-distance power trading, the plant could be lighting, cooling or heating the other end of the country.
Nonetheless, Ferc realises it has to be more of a bully to preach the right model for US power, even if that means treading on state sensibilities. "We were overly deferential to California's rules and market design," says one Ferc official.
US companies hope President Bush will give them a freer run at foreign as well as domestic oil. The US has trade and investment bans on eight countries - of which Iraq, Iran and Libya are Opec members, and a fourth, Sudan, a growing oil producer. The upshot, according to Cambridge Energy Research Associates, may be to reduce the production capacity of the three sanctioned Opec producers by 1.5-2m b/d.
That, in turn, makes the world market tighter than it would otherwise have been, to the obvious detriment of such a big oil importer as the US.
US companies clearly fret more at the unilateral sanctions on Iran and Libya than the multilateral United Nations embargo on Iraq, which also restricts their competitors.
It may also be time for the US to recognise not only how outdated the notion of energy independence at home is, but also the wisdom of cloaking its foreign energy policy in a more multilateral guise.
The Baker Institute-Council on Foreign Relations report suggests ways this might be done.
The US could take a less confrontational line towards Opec on prices, set Russia an example by signing the European energy charter treaty that governs energy trade and transit, and adopt a hemispheric approach to energy relations with Canada and Mexico. |
