_

It has been four years since Jay Hakes wrote a book about energy independence and the benefits it could give the United States.

But would it ever happen? The former head of the Energy Information Administration was hopeful, though he had seen a promising effort to curb imports in the 1970s and the early 1980s eventually derailed by cheap imported oil.

His optimism, however, is growing that the country is again on a path to energy independence and that this time it could stick. A multiprong effort that includes increased domestic oil and natural-gas production, energy efficiency and more biofuels has already helped push petroleum imports down to 45 percent of the petroleum needed to meet U.S. demand, compared with 60 percent in 2005.

“There is not a silver bullet, but there is silver buckshot,” Hakes said.

The idea that energy independence is an achievable goal has made it an issue in the presidential campaign, although it has been overshadowed by jobs and the economy.

Republican nominee Mitt Romney promises to be more aggressive on drilling for oil and natural gas by opening most areas where it is not now allowed, including off the Pacific Coast. He would also approve the Keystone pipeline, which would boost oil imports from Canada.

President Barack Obama, a Democrat, is pushing an “all of the above” approach and has some differences with Romney’s. Obama would increase drilling, but some areas would remain off limits. He has approved a portion of the Keystone line, but says he won’t make a decision on the northern leg until next year.

The Obama administration in August announced new vehicle fuel economy standards, rising to an average of 54.5 miles per gallon. Romney opposes the new standard.

But this much seems clear despite the different approaches: Our reliance on foreign oil will decline.

“No matter who is elected, we will be more energy independent every year for the next decade, unless there are some extreme policy changes,” said James Williams, an analyst for WTRG Economics.

There is a range of forecasts to show the point. The Energy Information Administration has one of the more conservative outlooks. The federal agency expects that by 2024 the United States will produce enough petroleum and biofuels to meet 62 percent of demand. Toss in what Canada delivers, and it could rise to 75 percent.

The American Petroleum Institute, an oil industry trade group, wants to unleash the drilling rigs, including into current off-limits areas. By 2024, it says, U.S. production could provide 74 percent of the country’s liquid fuels and biofuels 10 percent more. Toss in a growing contribution from Canada, and the United States wouldn’t need petroleum from any other country.

There are problems with both forecasts. The Energy Information Administration considers only policies in place when it makes its forecasts, so its outlook for production and energy conservation could be understated. The American Petroleum Institute by contrast is probably overestimating production gains, in part because environmental objections could curb drilling in some areas.

Neither forecast contains big contributions from electric or natural gas-powered vehicles, which shouldn’t be counted out. And a major development such as a breakthrough that would commercially produce fuel from algae would be a game changer.

On the pessimistic side, some analysts think the world oil situation will be much worse than most forecasters are saying. They think production estimates are too optimistic and in any event will be overtaken by rising demand from China and other emerging countries.

Defining and measuring energy independence can be difficult. Typically it’s thought to mean being completely self-sufficient, but Hakes said reducing imports to between 25 and 33 percent of demand would be enough to make the United States less beholden to Middle East supplies and would shield the country’s economy from the kind of oil shock that happened during the OPEC embargo in the 1970s.

Future progress will depend on increased supplies of liquid fuels while curbing domestic consumption.

Here are some things to watch:

-Total supplies of liquid fuels come from crude oil, natural gas liquids, biofuels such as ethanol, and even a gain in the refining process that produces more petroleum products than the volume of oil going in. One of the easiest ways to keep track is U.S. crude oil production, which has already reversed a decline.

August production averaged 6.1 million barrels a day compared with 4.9 million barrels four years ago. That happened despite a decline in Gulf of Mexico production, which was more than offset by places such as North Dakota, which is recovering oil from shale.

-Biofuels, mainly ethanol, have become a major player in reducing imports, displacing about 6 percent of annual demand for petroleum gasoline. A federal mandate calls for more than doubling biofuels by 2022, but there are challenges. One big hurdle is bringing along the process of making cellulosic ethanol, which uses ingredients such as corn stalks and switchgrass instead of corn.

-Overall U.S. consumption of petroleum has declined by more than 2 million barrels per day. A good chunk of that decline – perhaps half – came from the weak economy. But efforts are under way that could keep consumption down, including the fuel economy standards for vehicles. The Obama administration says the fuel savings from model years through 2025 will amount to 2.2 million barrels of oil a day.

-Finally, there is Canada, which accounts for 29 percent of U.S. oil imports. The country reduced oil exports to the United States during the 1970s embargo because it needed the oil for itself, but it is still considered our most reliable supplier. Decisions such as whether to approve the Keystone pipeline could decide whether it will supply more in the future, further reducing imports from other countries.

 

original article

_

An energy policy for the United States has become like the weather: everyone talks about it, but no one ever does anything about it. This lack of consistent direction has created volatile, and recently, sharply negative returns to investors in the Alternative Energy space.

With a lot of hot air being generated in the months until the Presidential election, perhaps the wind power generation sector is a place to invest? On the contrary — equity research analysts are warning that this sector is about to be…well, gone with the wind.

Christopher Blansett, the Senior Equity Analyst covering the alternative energy and semiconductor capital equipment sectors at JPMorgan Chase & Co. (JPM), put it this way in an August 20 interview:

Unfortunately, we’re looking at the end of federal subsidization for the wind sector at the end of the year. So we’re seeing a lot of last-minute rush work getting done this year to try to make sure wind projects are completed before the subsidy program expires. We’re going to have a very strong second half of the year, but unfortunately, unless Congress does something to extend the current wind subsidy, we’re going to have a very weak 2013, down easily more than 50%, and potentially more than 75% year over year.

A 75% drop in top line industry revenues is not a market investors want to buy. Sadly, the domestic solar power production sector is little better. The alternative energy expert from Raymond James & Associates, Pavel Molchanov, had this to say in a recent interview:

Unfortunately, for investors, most of the publicly traded companies in the solar value chain are the manufacturers — in other words, the very companies that are facing significant oversupply — and as a result, persistent margin pressures — and in many cases, negative earnings and even negative cash flow.

Margin pressures, negative earnings and negative cash flow are not headlines that inspire investing confidence, and sophisticated investors immediately recognize a bad asset class when two different research analysts both start sentences with the word “unfortunately.”

So are there “Clean Energy” and “Alternative Energy” stocks relevant for investors? Is an energy independent U.S. investment thesis completely dead?

Instead of stocks that rely on government subsidized revenues and inherently volatile international commodity sources, I suggest an investment focus on pure domestic energy sources and local electrical power generation. Several stocks and sectors are positively correlated to this premise.

Currently, natural gas powered turbines generate 25% of electricity in the United States. This component of U.S. electrical power generation will continue to grow as coal based electricity declines from ever increasing emission restrictions. As Curt Launer, an Institutional Investor Hall of Fame analyst, said in a recent interview:

So to go to the main point about your question, natural gas becoming a baseload fuel really just has utilization factors for natural gas rising. And with the environmental benefits that are there, the advent of the shale plays in terms of production of more natural gas, we see natural gas becoming a baseload fuel, and we also see natural gas demand for power generation growing dramatically over the next five years. Our specific number in that regard is that natural gas demand for power generation will grow nearly 5% per year in each of the next five years.

The increase in supply will continue to come from the “fracking” of extensive shale formations all over the continental U.S. Since there are currently a grand total of zero LNG export terminals in the lower 48 states, the export of significant amounts of liquefied natural gas from the U.S. will not become a reality until 2016 at the earliest. Simply put, the natgas found within the U.S. is going to stay here.

The equity values of the domestic producers of natural gas have dropped dramatically as the ever increasing supply of this commodity has driven prices to historic lows. Interestingly, the pipelines that deliver natgas to the electricity utilities that use it are enjoying new growth prospects. Similar to railroads in the 19th century, these “midstream” pipeline companies are deriving the benefit from being the intermediary between the increase in natural gas supply with the increase in demand from electrical generation utilities.

These pipeline companies enjoy extremely high barriers to entry: significant existing regulation, a vocal environmental lobby, and an average of $1 million per mile in construction costs. Several of these “midstream” pipeline companies have been identified as having trustworthy management, hefty yields and safe balance sheets: Williams Companies (WMB) and its pipeline only subsidiary master limited partnership Williams Partners (WPZ), and the similar Spectra Energy (SE) and its subsidiary Spectra Energy Partners (SEP).

Another area of interest is the development of single home kilowatt solar power rather than megawatt sized projects. In this case, small is beautiful. Consider a new home built using the Dow Chemical Company’s (DOW) new Powerhouse shingles. Using any local roofing contractor, and thereby putting construction workers back on the job and off the unemployment line, the Dow shingles generate electricity that feeds back into the electrical grid, running your meter backward.

To convert the direct current power from the sun into usable grid power, the solar roof system benefits from the efficiency of the Enphase (ENPH) “MicroInverter.” Forbes Blue Chip Analyst Molchanov of Raymond James identified Enphase as a company to watch:

One good example that actually went public just in March is Enphase Energy . Enphase is a unique pure play on microinverters. What is a microinverter? It is a replacement to a traditional solar inverter, and just about every installed PV system has to have an inverter of one kind or another to take DC power and convert it into AC power for the grid. Microinverters are a cutting-edge product that brings smart grid functionality and advanced communications into the solar arena. Microinverters boost power output of PV systems and improve project IRRs by between 1% and 2%.

The target market is residential and small commercial systems — in other words, this is not for large solar farms. Because microinverters are a very new technology with a narrow set of competitors, Enphase is emphatically not a commodity company. In fact, it is the world’s only major producer of microinverters…

If you get tired of feeding the solar energy generated back to the grid you can always use it to power up your new Tesla Model S electric sedan. While a record 2500 Chevy Volts sold this August is encouraging to General Motors (GM) shareholders; Daimler (DDAIF.PK) and Toyota Motors have already licensed the Tesla (TSLA) powertrain technology. The new Model S is sold out a year in advance, a business state that the executives at GM cannot fail to notice.

And be sure to light up your Tesla laden garage and the highways it goes (zero to 60 mph in 4.4 seconds) on with energy saving LED lights. These lights are produced from factories with Veeco Instruments (VECO), a top pick from JPMorgan analyst Christopher Blansett:

I think the key thing to look for here that investors really focus on is lack of new entrants, because whether I’m making LEDs or other parts of the food chain, there seems to always be the ability for someone new to show up. But in this very critical capital equipment segment of the food chain, it’s very difficult for a new entrant to come. It’s one of the few places where there is a huge barrier to entry. So we like that aspect, like their variable cost model, and we like the fact that they have very low capex to revenue.

Perhaps an energy sufficient and efficient U.S. is not such a poor investment after all? Using roof top solar to generate sufficient electrical energy to power your car, and pouring the excess back into an electrical grid supported by domestically supplied natural gas is an envious situation. Certainly, the United States is the only country on the planet capable of developing this positive productivity loop all by itself. It would be a fine way to earn a long term return on your portfolio.

 

original article

_

The chief executive of Royal Dutch Shell PLC on Thursday said that whichever political party wins the U.S. presidential election in November should formulate an energy policy with a view to achieving “near energy independence” within 20 years.

Swiss CEO Peter Voser, who heads Europe’s largest oil company, was speaking after his company’s second quarter earnings showed a greater than expected decline in profits, due mostly to lower oil prices.

At a meeting with analysts in London, Voser said that energy independence could be possible using a combination of newly-available technologies for extracting oil in difficult-to-reach areas, including the icy Alaska seas where Shell is undertaking exploratory drilling this summer, deep sea operations in the Gulf of Mexico, heavy oil sands, and especially developing the US’s large natural gas reserves would all help.

“On top of it all, it would bring manufacturing industries back into the country, petrochemical industry back into the country, because you have a cheap feedstock,” in the form of natural gas, Voser said.

“I think whoever is in charge of energy policy…will look at this on the one side as a secure energy policy but on the other side also about jobs and revenues.”

Shell’s “current cost of supplies” earnings – a figure that strips out the impact of swings in the price of oil between its production and sale – was $6.0 billion ((EURO)4.94 billion), compared with $8.0 billion in the second quarter a year ago, the company said Thursday.

“Our profits have fallen with energy prices,” said Voser.

Net profit fell 53 percent to $4.06 billion from $8.66 billion: in 2011 the company booked $1.44 billion worth of asset sales. Production rose 1.9 percent to 3.103 barrels of oil per day from a year ago, but was down from the previous quarter as several large Shell facilities were off-line for maintenance during the quarter.

The company’s sales fell to $117.1 billion from $121.2 billion a year ago.

The main reason for the fall was lower oil prices: prices are down more than 40 percent from the second quarter of 2011. At Shell’s production arm, earnings fell 23 percent to $4.69 billion from $6.06 billion.

The company’s shares closed down 2.3 percent at (EURO)27.275 ($33 44) in Amsterdam.

“Maintenance and outage issues have put pressure on the upstream business, whilst the deterioration in the oil price of late has weakened profitability,” said analyst Keith Bowman of Hargreaves Landsdown in London. “At a time when investors are looking towards blue chip reliability, the disappointment contained in the headline figures is palpable.”

He said Shell remains his favorite pick in the sector because of its potential for expanding production in the coming years.

At Shell’s “downstream” operations, which include refining and chemical sales, the company’s performance improved 20 percent to $1.3 billion, excluding the impact of asset sales.

 

original article

For nearly 40 years, policy makers have talked about weaning the U.S. off imported oil from the Middle East to little or no avail because of America’s huge thirst for energy.

Now, The Wall Street Journal reports that a rise of supplies from Canada,  South America, as well as greater shale oil output at home could help the U.S. finally achieve that goal by 2035.  See: WSJ story:  Expanded oil drilling helps U.S.

The story focuses only on oil and doesn’t even factor in the possible impact of electric cars, and natural gas-powered trucks that are filtering into the complicated U.S. energy equation.

A recent study by the Organization of Petroleum Exporting Countries, which first hobbled the U.S. with a spike in gasoline prices in the 1973 oil embargo, noted that oil shipments from the Middle East to North America “could almost be nonexistent” in 23 years as renewable fuels and rising oil production make their way into the domestic market.

Even without Middle East oil being sold to the U.S., the region will still shape global oil prices in the future. But over time, the U.S. could pare back its attention on the politically volatile region, at least in terms of its energy and military policies.

The latest forecasts from the U.S. Energy Information Administration call for U.S. imports from the Middle East, Europe and Africa to fall to 2.5 million barrels a day by 2020, more than four million barrels a day now.

The supplies closer to home include: Canadian oil sands in Alberta, offshore reserves in Brazil, the Bakken fields of North Dakota, and the deeper waters of the Gulf of Mexico. Venezuela also contains vast reserves of heavier grades of crude

To be sure, plenty of hurdles remain. In Brazil for example, state-run oil giant Petrobras  PBR +1.87% recently pared back its production forecasts, and Chevron  CVX +1.98% is facing criminal charges after an oil leak off the coast of Rio de Janeiro.  Here in the U.S., a bid by TransCanada  TRP -0.02% to build the Keystone Pipeline to move crude from the Canadian oil sands to U.S. refineries  has run into strong opposition from environmentalists.  Hydraulic fracturing, or fracking, which is used to extract oil from domestic fields, has drawn a ban in New York City’s watershed. A new measure in New Jersey would prevent the transport of wastewater from fracking through the Garden State.

But up until just a couple of years ago, few thought the U.S. could manage to cut its dependence on Middle East oil. Improved technology for extracting the earth’s oily riches has changed that, along with efforts from Argentina to the Arctic to search and develop fresh oil reserves.  Future innovations could also help ease some of the environmental concerns through less water-intensive methods of fracturing rock to free up oil and natural gas.

Original Article

_

Call it Richard Nixon’s revenge.

Amid election-year furor over high gasoline prices, something significant has happened to America’s energy outlook. We are steadily reducing our dependence on imported oil – a long-ago Nixon goal. In 1973, he proposed being free of imports by 1980. It didn’t happen, and although politicians of both parties frequently echoed Nixon’s popular call for “energy independence,” most experts considered it a joke.

Production from mature U.S. fields was declining, while Americans’ energy thirst increased. Oil imports went from 35 percent of use in 1973 to 60 percent in 2005. As for natural gas, companies prepared to import LNG (liquefied natural gas).

No more. The LNG isn’t needed; the United States is approaching self-sufficiency in gas. And in 2011, oil imports fell to 45 percent of consumption, the sixth year of decline. Behind these developments lies a new reality: America’s oil and gas reserves are far larger than previously thought.

The real issue – for the election and victor – is how aggressively we exploit these reserves. President Barack Obama is right about today’s gasoline prices. They’re set in world markets subject to upsets (for example, erratic production from Libya and Sudan) over which we have little control. But the longer term is different. By encouraging production, we can enhance our energy security and help stabilize global markets – and prices – through greater supply.

First, some background on U.S. oil and natural gas resources. Start with gas. In 2000, U.S. supplies were estimated at about 1,000 trillion cubic feet (annual consumption: 22 trillion to 24 trillion cubic feet); now, estimates cluster around 2,000 trillion cubic feet, with some even higher. The increases mostly reflect shale gas, which was once believed too expensive to produce because it was packed tightly in formations. “Fracking” (injecting water into the formations to free the gas) and horizontal drilling (extending one pipe along the formation instead of drilling many vertical wells) lowered costs.

Oil is trickier. In 2009, U.S. “proved reserves” were 22 billion barrels. That’s less than 2 percent of world reserves, a figure often cited by Obama; it’s tiny considering that Americans use almost 7 billion barrels annually. But proved reserves is a narrow concept, including only fields where drilling confirms that recovery is economically feasible. By contrast, “resources” are estimates of economically recoverable oil based on general geology and production technology. These estimates, though less certain, are much higher.

The National Petroleum Council – a group of industry officials, consultants and academics that advises the government – puts oil resources at 274 billion barrels, including 100 billion in the Arctic and 60 billion in the waters off the lower 48 states. Onshore, applying fracking and horizontal drilling to shale oil already has already stimulated a boom in North Dakota; Texas and California have similar formations. Meanwhile, U.S. oil use – reflecting high prices, more fuel-efficient cars and a weak economy – is falling. Finally, oil from Canadian “tar sands” (whose natural market is the United States) is estimated at 300 billion barrels.

Here are the ingredients for greater security. Getting to Nixon’s no net imports is not necessary if most imports come from Canada and other friendly countries. The true foolishness of Obama’s rejection of the Keystone XL pipeline was to encourage Canada to look elsewhere to sell its surplus oil.

Promoting production also involves jobs. Aside from hiring more geologists and roustabouts, energy investment creates demand for ancillary manufacturers. Low natural gas prices will promote “the re-industrialization of America” by favoring U.S. locations for petrochemical plants (gas is a feedstock) and industries with high-energy costs, says a study by Citigroup. A Wall Street Journal headline about the steel industry affirms the point: “Natural-Gas Boom Begets Low Prices for Fuel, Strong Demand for Piping.”

Until now, greater production has resulted mainly from private decisions. To continue, it needs more public support because many fields are on public lands and other projects require government permits. Obama has spent much of his first term attacking oil companies and praising wind and solar energy, which supply 1.2 percent and 0.1 percent of America’s primary energy and have almost nothing to do with oil use.

Obama counters we can’t drill our way out of dependence. True. We also need to restrain demand; the administration’s higher vehicle fuel-efficiency standards are one possibility.

The administration is relaxing its hostility toward oil, says Frank Verrastro of the Center for Strategic and International Studies. Maybe. But environmental purity and energy practicality are at odds. Fracking is controversial. Even with safeguards, more drilling will mean more environmental side effects. Deepwater Horizon was one reminder; a recent gas leak on a North Sea platform is another. How Obama and his opponent balance these goals will be a major campaign focus. It should be.

 

original article

_

Everything you think you know about energy security and energy independence is wrong. All too often you hear that fossil fuels will soon reach their peak, that our consumption of oil causes global insecurity vis-a-vis rogue states and terrorist organizations, and that the United States would benefit tremendously from becoming completely energy independent. Under closer scrutiny, however, the alarmist scenarios, political correctness, and chic notions of sustainability that dominate today’s energy discourse simply do not stand up to actual realities.

The truth is fossil fuels will continue to dominate international energy supplies for the long-term simply because they are the least expensive and most pervasive fuel resources the world currently possesses. Indeed, the amount of natural gas and new sources of oil being discovered today is enough to overwhelm any assertion of peak oil or the need to transition to a zero-carbon energy policy. Consider the sheer amount of petroleum and natural gas found in the one month of September in 2009: BP discovered three billion barrels of oil in the Gulf of Mexico; Spanish energy firm Repsol tapped into the largest natural gas find in Venezuela’s history; Anadarko Petroleum announced the likely presence of hydrocarbon fuels for 700 miles along the west African coastline; and Petrobras of Brazil found even more hydrocarbon fuels in the Santos Basin (which several years prior was said to contain enough energy to make Brazil a global energy power). Simply put, peak oil alarmists and hydrocarbon declinists conveniently ignore the immense power of new technology to harness deeper, untapped sources of fossil fuels. What hydrocarbon engineers can do now no scientist a mere 50 years ago ever thought possible. This accounts for why date estimations for peak oil are continually getting extended.

Many U.S. politicians and security wonks are fond of the assertion that Americans contribute to insecurity at home and around the world by our dependence on foreign oil. By this line of reasoning, our addiction to energy from the likes of Saudi Arabia and Venezuela has effectively bought us our own enemies. This analysis fails to confront such realities that, as a 2009 RAND study concluded, terrorist attacks are so inexpensive that a decrease in Middle Eastern oil revenues would have virtually no impact on al-Qaeda’s fundraising capabilities. To see the irony in the dubious assertions that we fund our own enemies, imagine the kinds of retaliation a state like Saudi Arabia would engage in if we banned their imports. It is not difficult to picture King Abdullah reacting with such scorn and fury as to create an actual national security threat to the United States. Furthermore, two of the largest suppliers of crude to the United States are Canada and Mexico, among our staunchest allies and countries that are hardly terrorist breeding grounds. All of the talk about the benefits of choking malevolent countries from U.S. oil demand borders on ignorant isolationism. Because oil is a global commodity, prices are established globally and oil buyers will seek producers that boast the lowest cost. Thus there is no doubt that Venezuela could simply reap an equal amount of petroleum revenues from China in the event that the U.S. embargoed its oil supplies. The prospect of more Chinese involvement in our own hemisphere means that this is hardly a win-win situation.

More importantly, consuming energy that is only produced at home, as many in the “energy independence” debate are keen to propose, has implications that are at best unclear and at worst actually counterproductive. The gap between oil production and oil consumption in America is so immense that any effort to eliminate oil imports would force extremely costly new patterns of production and consumption on our parts. Declaring that we would no longer engage in the international oil trade, in other words, might very well cause more damage to the U.S. economy than improvement. Many people tend to overlook the fact that while the United States does import the majority of its oil, it is also one of the world’s biggest oil exporters. This is because oil is one of many goods that are being exchanged in a global marketplace. To entertain the notion that we can cease such trade relationships is to deny the inherent benefits of free trade as well as revert back to the import-substitution policies of the past that have well-known records of historical failure.

Many potential domestic sources of energy, such as the Alaskan National Wildlife Refuge, have their fair share of opponents. The ultimate irony in the American energy discourse today is that many of those who voice support for energy independence also oppose domestic petroleum production. You need look no further for evidence of this than the Obama Administration’s stated goal of decreasing oil imports and yet simultaneously maintaining the ban on offshore drilling in both the Atlantic and the Pacific.

The last and most prevailing argument for energy security revolves around climate change. This line of reasoning argues that countries must come together to find more sustainable and less carbon-centric forms of energy so that we may live in a cleaner, safer, and cooler world. No matter where one’s views lie on the global warming debate, imagine a world where the U.S. told powers such as China and India that the coal-based method of production that has allowed their economies to undergo historic transformations in recent decades is no longer permitted; if unstable countries such as Nigeria were to be deprived of revenue that fuelled their financial systems; and if energy consumption became much more expensive worldwide simply due to precautionary measures taken by global politicians. In short, the notion that we would be more secure if we fundamentally transformed our energy system in order to stave off climate change is short-sighted.

All of this is not to suggest that we should abandon hopes for a more renewable and sustainable energy future. Indeed, there are many promises in the prospects of renewable energies. Yet, we must not kid ourselves to think that we can transform a crucial part of the global economy overnight, nor that our reliance of fossil fuels creates more problems than it does solutions. Nearly every source of energy comes with its own risks. And with this in mind we can conclude that the risks posed by fossil fuels are far outweighed by their benefits. While this may come across as heretical, the cold truth is that for the time being, there is little to no cause for alarm in how we consume our current energy supply.

 

original article

 

_

Natural gas futures were higher Tuesday, but analysts caution the low for the year may be yet to come, as unusually warm temperatures and abundant supply keep the pressure on prices.

Some analysts believe natural gas could even fall below $2 per million BTUs before it heads higher.

Natural gas futures [NGCV1  2.552    0.02  (+0.79%)   ] Tuesday were up more than 4 percent at $2.53 per million BTUs.

“It had mostly to do with short covering,” said John Kilduff of Again Capital. “The weather’s really moderate, and there’s really nothing out there.”

“The fundamentals remain bearish,” said Gene McGillian, an analyst with Tradition Energy. He said cheap prices drew in a lot of new speculative longs in recent weeks.

“We’ve been pivoting for the last two weeks between a dime of $2.50,” per million BTUs, McGillian said. But if the price starts to decline, some of those new longs might be the first to abandon the trade, driving prices down fast.

“I don’t think a $1 handle would be sustained, but I think there’s a good chance we could see it at some point,” he said.

Natural gas prices, which fell to a decade low in January, have had a bit of a reprieve as some companies, like Chesapeake[CHK  22.71    0.05  (+0.22%)   ], announced they would cut back on drilling activity. “If you get more production shut ins, that would probably close a door on it,” and natural gas could head higher, McGillian said.

Kilduff said there is a record amount of natural gas in storage, and the estimates for the winter season’s end, March 31, range from about 2.2 to 2.4 trillion cubic feet, well above the average 1.5 trillion cubic feet. The highest previous gas in storage level was 2.143 trillion cubic feet in 1983, he said.

Kilduff says he expects to see a weekly withdrawal of 112 bcf when the Energy Information Agency releases data on Thursday. Last year’s withdraw at this time was 230 bcf and the five year average is 178 bcf.

“In terms of demand, the winter was a bust. In New York City, we’re 20 percent behind in terms of heating degree days,” Kilduff said.

“I’m looking for it to bottom out at about $1.80 to $1.85 (per million BTUs). That would be most likely in the April time frame,” Kilduff said. “That will be the start of the injection season and that will be the dynamic in which the inventory system will get rebalanced and whatever gas has to exit storage will be hitting the open market then.”

The injection season runs from April 1 to November 1, when builds are made to storage. The withdrawal season is the balance of the year, when supplies are drawn down for winter heating use.

Dennis Gartman of the Gartman Letter said he’s not interesting in playing the short in natural gas even though he said the price could still go lower.

“Is natural gas cheap? Golly day, it’s unbelievably so, and the only thing these natural gas people are hoping for now is a really hot summer…which would require excess firing for electricity to meet air conditioning demand, but that is not going to happen anytime between now and June,” said Gartman.

He agreed the price could fall below $2 per million BTUs temporarily. “It will do that without me aboard,” he said. Natural gas hit a high of $15.3780 per million BTUs on Dec. 13, 2005.

The U.S. natural gas supply has gotten a big boost from shale gas production, which has been criticized for its potential environmental impacts, including water contamination.

“It’s amazing how we have learned to do with fracking, and how cheap we’ve been able to drill,” said Gartman. “…the benefits are enormous economically, and think about it, I like to tell people that right now North America is energy independent, even if the United States might not be.”

Hydraulic fracturing, or fracking, requires millions of gallons of water, sand and chemicals to be pumped into the ground, to break apart rock structures, to free natural gas that was otherwise unobtainable.

Shale gas production provides an estimated 35 percent of the U.S. natural gas supply, from 2 percent in 2000, according to IHS CERA.

 

original article

_

The U.S. is the closest it has been in almost 20 years to achieving energy self-sufficiency, a goal the nation has been pursuing since the 1973 Arab oil embargo triggered a recession and led to lines at gasoline stations.

Domestic oil output is the highest in eight years. The U.S. is producing so much natural gas that, where the government warned four years ago of a critical need to boost imports, it now may approve an export terminal. Methanex Corp., the world’s biggest methanol maker, said it will dismantle a factory in Chile and reassemble it in Louisiana to take advantage of low natural gas prices. And higher mileage standards and federally mandated ethanol use, along with slow economic growth, have curbed demand.

The result: The U.S. has reversed a two-decade-long decline in energy independence, increasing the proportion of demand met from domestic sources over the last six years to an estimated 81 percent through the first 10 months of 2011, according to data compiled by Bloomberg from the U.S. Department of Energy. That would be the highest level since 1992.

“For 40 years, only politicians and the occasional author in Popular Mechanics magazine talked about achieving energy independence,” said Adam Sieminski, who has been nominated by President Barack Obama to head the U.S. Energy Information Administration. “Now it doesn’t seem such an outlandish idea.”

The transformation, which could see the country become the world’s top energy producer by 2020, has implications for the economy and national security — boosting household incomes, jobs and government revenue; cutting the trade deficit; enhancing manufacturers’ competitiveness; and allowing greater flexibility in dealing with unrest in the Middle East.

Output Rising

U.S. energy self-sufficiency has been steadily rising since 2005, when it hit a low of 70 percent, the data compiled by Bloomberg show. Domestic crude oil production rose 3.6 percent last year to an average 5.7 million barrels a day, the highest since 2003, according to the Energy Department. Natural gas output climbed to 22.4 trillion cubic feet in 2010 from 20.2 trillion in 2007, when the Federal Energy Regulatory Commission warned of the need for more imports. Prices have fallen more than 80 percent since 2008.

At the same time, the efficiency of the average U.S. passenger vehicle has helped limit demand. It increased to 29.6 miles per gallon in 2011 from 19.9 mpg in 1978, according to the National Highway Traffic Safety Administration.

The last time the U.S. achieved energy independence was in 1952. While it still imported some petroleum, the country’s exports, including of coal, more than offset its imports.

Environmental Concern

The expansion in oil and natural gas production isn’t without a downside. Environmentalists say hydraulic fracturing, or fracking — in which a mixture of water, sand and chemicals is shot underground to blast apart rock and free fossil fuels — is tainting drinking water.

The drop in natural gas prices is also making the use of alternative energy sources such as solar, wind and nuclear power less attractive, threatening to link the U.S.’s future even more to hydrocarbons to run the world’s largest economy.

Still, those concerns probably won’t be enough to outweigh the benefits of greater energy independence.

Stepped-up oil output and restrained consumption will lessen demand for imports, cutting the nation’s trade deficit and buttressing the dollar, said Sieminski, who is currently chief energy economist at Deutsche Bank AG in Washington.

Cutting Trade Deficit

With the price of a barrel of oil at about $100, a drop of 4 million barrels a day in oil imports — which he said could happen by 2020, if not before — would shave $145 billion off the deficit. Through the first 11 months of last year, the trade gap was $513 billion, according to the Commerce Department. Crude for March delivery settled at $96.91 a barrel yesterday on the New York Mercantile Exchange.

The impact on national security also could be significant as the U.S. relies less on oil from the Mideast. Persian Gulf countries accounted for 15 percent of U.S. imports of crude oil and petroleum products in 2010, down from 23 percent in 1999.

“The past image of the United States as helplessly dependent on imported oil and gas from politically unstable and unfriendly regions of the world no longer holds,” former Central Intelligence Agency Director John Deutch told an energy conference last month.

Arab Oil Embargo

That dependence was underscored in October 1973, when Arab oil producers declared an embargo in retaliation for U.S. help for Israel in the Yom Kippur war. The U.S. economy contracted at an annualized 3.5 percent rate in the first quarter of the next year. Stock prices plunged, with the Standard & Poor’s 500 Index dropping more than 40 percent in the year following the embargo.

Car owners were forced to line up at gasoline stations to buy fuel. President Richard Nixon announced in December that because of the energy crisis the lights on the national Christmas tree wouldn’t be turned on.

Today, signs of what former North Dakota Senator Byron Dorgan says could be a “new normal” in energy are proliferating. The U.S. likely became a net exporter of refined oil products last year for the first time since 1949. And it will probably become a net exporter of natural gas early in the next decade, said Howard Gruenspecht, the acting administrator of the EIA, the statistical arm of the Energy Department.

Cheniere Energy Partners LP may receive a construction and operating permit as early as this month from the Federal Energy Regulatory Commission for the first new plant capable of exporting natural gas by ship to be built since 1969 in the U.S. Houston-based Cheniere said it expects the $6 billion plant to export as much as 2.6 billion cubic feet of gas per day.

Mitchell the Pioneer

The shale-gas technology that’s boosting U.S. natural gas production was spawned in the Barnett Shale around Dallas and Fort Worth by George P. Mitchell, who was chairman and chief executive officer of Mitchell Energy & Development Corp.

Helped by a provision inserted in the 1980 windfall oil profits tax bill to encourage drilling for unconventional natural gas, the Houston-based oil man pursued a trial-and-error approach for years before succeeding in the late-1990s. The fracking method he devised cracked the rock deep underground, propping open small seams that allowed natural gas trapped in tiny pores to flow into the well and up to the surface.

Recognizing that Mitchell was on to something, Devon Energy Corp. bought his company in 2002 for about $3.3 billion and combined it with its own expertise in directional drilling, a method derived from offshore exploration.

Hunting for Oil

Traditional vertical drilling bores straight down, like a straw stuck straight in the earth. Directional drilling bends the straw, boring horizontally sometimes a mile or more through the richest layer of rock, allowing more of the trapped fuel to make it into the well. This slice of rock is like the kitchen, where ancient plants and creatures came under so much pressure that they cooked into natural gas and oil.

The oil boom a century ago tapped reservoirs of fuel that rose out of those layers and got trapped in large pockets closer to the earth’s surface, or used vertical wells that could get out only a portion of the fuel stored in the rock. The new technology has Devon and its competitors hunting beneath decades-old oil plays long thought depleted.

About an hour’s drive north from where Devon’s soon-to-be- completed new glass headquarters towers 50 stories above downtown Oklahoma City, the company is exploring for oil in the Mississippian and other formations, where oil majors once made their fortunes. It’s racing companies such as Chesapeake Energy Corp. and SandRidge Energy Inc. to buy leases and drill wells.

North Dakota Booming

Crude production in the U.S. is already increasing. Within three years, domestic output could reach 7 million barrels a day, the highest in 20 years, said Andy Lipow, president of Lipow Oil Associates in Houston, a consulting firm. The U.S. produced 5.9 million barrels of crude oil a day in December, while consuming 18.5 million barrels of petroleum products, according to the Energy Department.

North Dakota — the center of the so-called tight-oil transformation — is now the fourth largest oil-producing state, behind Texas, Alaska and California.

The growth in oil and gas output means the U.S. will overtake Russia as the world’s largest energy producer in the next eight years, said Jamie Webster, senior manager for the markets and country strategy group at PFC Energy, a Washington- based consultant.

While U.S. consumers would still be susceptible to surges in global oil prices, “we’d end up sending some of that cash to North Dakota” rather than to Saudi Arabia, said Richard Schmalensee, a professor of economics and management at the Massachusetts Institute of Technology in Cambridge.

1.6 Million Jobs

The shale gas expansion is already benefiting the economy. In 2010, the industry supported more than 600,000 jobs, according to a report that consultants IHS Global Insight prepared for America’s Natural Gas Alliance, a group that represents companies such as Devon Energy and Chesapeake Energy.

More than half were in the companies directly involved and their suppliers, with the balance coming at restaurants, hotels and other firms. By 2035, the number of jobs supported by the industry will rise to more than 1.6 million, IHS said. Some 360,000 will be directly employed in the shale gas industry.

The oil boom is also pushing up payrolls. Unemployment in North Dakota was 3.3 percent in December, the lowest of any state. Hiring is so frantic that the McDonald’s Corp. restaurant in Dickinson is offering $300 signing bonuses.

State governments are reaping benefits, too. Ohio is considering a new impact fee on drillers and increasing the tax charged on natural gas and other natural resources extracted, Governor John Kasich has said.

In Texas, DeWitt County Judge Daryl Fowler has negotiated an $8,000-per-well fee from drilling companies to pay for roads in the district, southeast of San Antonio.

Lot of Traffic

“It takes 270 loads of gravel just to build a pad used for drilling a well, which means a lot of truck traffic on a lot of roads that nobody except Grandpa Schultz and some deer hunters may have used in the past,” said Fowler, whose non-judicial post gives him administrative control over the county.

The federal government will see tax payments from shale gas rise to $14.5 billion in 2015 from $9.6 billion in 2010, according to IHS. Over the period 2010 to 2035, revenue will total $464.9 billion, it said.

Manufacturing companies, particularly chemical makers, also stand to win as the shale bonanza keeps natural gas cheaper in the U.S. than in Asia or Europe.

Dow Chemical Co., which spent a decade moving production to the Middle East and Asia, is leading the biggest expansion ever in the U.S. The chemical industry is one of the top consumers of natural gas, using it both as a fuel and feedstock to produce the compounds it sells.

First Since 2001

Midland, Michigan-based Dow is among companies planning to build crackers, industrial plants typically costing $1.5 billion that process hydrocarbons into ethylene, a plastics ingredient.

The new crackers will be the first in the U.S. since 2001, said John Stekla, a director at Chemical Market Associates Inc., a Houston-based consultant.

Vancouver-based Methanex said last month it plans to take apart the idled Chilean factory and ship it to Louisiana to capitalize on natural gas prices.

The shift to increased energy independence is also the result of government policies to depress oil demand.

“Vehicles are getting more efficient, and people who travel won’t be driving more miles,” said Daniel Yergin, chairman of IHS Cambridge Energy Research Associates.

Automakers have agreed to raise the fuel economy of the vehicles they sell in the U.S. to a fleetwide average of 54.5 miles per gallon by 2025 under an agreement last year with the Obama administration.

No ‘Silver Bullet’

The 2008-09 recession helped lower oil demand, and consumption has lagged even as the economy has recovered, said Judith Dwarkin, director of energy research for ITG Investment Research in Calgary. Coupled with higher domestic output, “this has translated into an import requirement of some 15.4 barrels per person per year — about on par with the mid-1990s.”

She cautioned against thinking that rising oil and gas production is a “silver bullet” for solving U.S. economic woes.

Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, agreed, saying in a Jan. 20 note to clients that oil and gas output accounts for just 1 percent of gross domestic production and isn’t likely on its own to be able to pull the economy into above-trend growth.

Cooling on Wind

Some companies are hurting from the shale gas glut. With abundant supplies making it the cheapest option for new power generation, Exelon Corp. scrapped plans to expand capacity at two nuclear plants, while Michigan utility CMS Energy Corp. canceled a $2 billion coal plant after deciding it wasn’t financially viable. NextEra Energy Inc., the largest U.S. wind energy producer, shelved plans for new U.S. wind projects next year.

Investors also are cooling on wind investment, partly because of falling power prices. T. Boone Pickens, one of wind power’s biggest boosters, decided to focus on promoting natural gas-fueled trucking fleets after dropping plans for a Texas wind farm in 2010.

“Wind on its own without incentives is far from economic unless gas is north of $6.50,” said Travis Miller, a Chicago- based utility analyst at Morningstar Inc. Natural gas for March delivery settled at $2.55 per million British thermal units on New York Mercantile Exchange yesterday.

When Obama lauded increased energy production in his State of the Union speech on Jan. 24, he drew criticism from some environmentalists opposed to fracking.

Waning Confidence

“We’re disappointed in his enthusiasm for shale gas,” said Iris Marie Bloom, director of Protecting Our Waters in Philadelphia. Obama “spoke about gas as if it’s better for the environment, which it’s not.”

Deutch, who headed an advisory panel on fracking for the Energy Department, voiced concern that public confidence in the technology will wane if action isn’t taken to address environmental concerns. The potential positive impact of increased North American production are “enormous,” he said.

Higher U.S. output lessens the ability of countries like Iran and Russia to use “energy diplomacy” as a means of strengthening their influence, Amy Myers Jaffe, director of the Baker Institute Energy Forum at Rice University, and her colleagues wrote in a report last year.

While the U.S. will still have to pay attention to issues such as Israel’s security and Islamic fundamentalism in the Mideast, which could affect oil prices, it won’t have to be as worried about its supplies.

Positive ‘Shock’

Carlos Pascual, special envoy and coordinator for international energy affairs at the State Department, suggested at a Council on Foreign Relations conference in December that the increased production in the U.S. and elsewhere gives Washington more “maneuverability” in using sanctions to deal with Iran and its nuclear aspirations.

The increased U.S. production of oil and natural gas is a “positive supply shock” for the economy and for national security, said Philip Verleger, a former director of the office of energy policy at the Treasury Department and founder of PKVerleger LLC, a consulting firm in Aspen, Colorado.

“We aren’t there yet, but it looks like we’re blundering into a solution for the energy problem,” he said.

 

original article