Ukraine crisis: There is no US 'energy weapon'

Commentators were falling all over themselves last week to announce that far from being impotent in the Ukraine crisis, the United States had a very important weapon: growing oil and natural gas production which could compete on the world market and challenge Russian dominance over Ukrainian and European energy supplies--if only the U.S. government would change the laws and allow this bounty to be exported.

But, there's one very big problem with this view. The United States is still a net importer of both oil and natural gas. The economics of natural gas exports beyond Mexico and Canada--which are both integrated into a North American pipeline system--suggest that such exports will be very limited if they ever come at all. And, there is no reasonable prospect that the United States will ever become a net exporter of oil.

U.S. net imports of crude oil and petroleum products are approximately 6.4 million barrels per day (mbpd). (This estimate sits between the official U.S. Energy Information Administration (EIA) numbers of 5.5 mbpd of net petroleum liquids imports and 7.5 mbpd of net crude oil imports. And so, to understand my calculations, please see two comments I made in a previous piece here and here. My number is for December 2013, the latest month for which the complete statistics needed to make my more accurate calculation are available.) 

The EIA in its own forecast predicts that U.S. crude oil production (defined as crude including lease condensate) will experience a tertiary peak in 2016 around 9.5 mbpd just below the all-time 1970 peak and then decline starting in 2020. This level is far below 2013 U.S. consumption of about 13.2 mbpd of actual petroleum-derived liquid fuels. (This number excludes natural gas-derived liquids which can only be substituted for petroleum-derived liquids on a very limited basis.)

So, when exactly is the United States going to drown the world market in oil and thereby challenge the Russian oil export machine? The most plausible answer is never. And, the expected 2016 peak in U.S. production is only about 1.5 mbpd higher than production today. That's really quite small compared to worldwide oil production of about 76 mbpd. And, there's no guarantee that the rest of the world isn't going to see a decline in oil production between now and then. So much for the supposed U.S. oil "weapon" taming the Russian bear.

But what about natural gas? Surely, America's great bounty of natural gas from shale could challenge the Russians. Well, not really. It's true that U.S. natural gas production trended up significantly from its post-Katrina nadir in 2005. But the trend has now stalled. U.S. dry natural gas production has been almost flat since January 2012. The EIA reports total production of 24.06 trillion cubic feet (tcf) for 2012 and 24.28 tcf for 2013, a rise of only 0.9 percent year over year.

Not mentioned by any of the commentators touting the U.S. natural gas "weapon" is that U.S. natural gas imports for 2013 were about 2.88 tcf or about 11 percent of U.S. consumption. So, let me see if I understand this: The plan seems to be to import more so we can export more. And this would change exactly what in the worldwide supply picture?

Certainly, it is true that low U.S. natural gas prices have reduced drilling and exploration dramatically. But prices will likely have to rise above $6 and trend higher as time passes as the easy-to-get shale gas is used up and only the more costly and difficult reservoirs remain. Drillers don't keep drilling unless they can make money and that will require significantly higher prices.

And, here's the kicker. In order to ship U.S. natural gas to Europe or Asia, it has to be liquefied at -260 degrees F, shipped on special tankers and then regasified. The cost of doing this is about $6 per thousand cubic feet (mcf). So, the total cost of delivering $6 U.S. natural gas to Europe is around $12 per mcf. With European liquefied natural gas (LNG) prices mostly below this level for the last five years, it's hard to see Europe as a logical market. Japan would be a better target for such exports with prices moving between $15 and $18 per mcf in the last five years. But a U.S. entry into the LNG market could conceivably depress world prices and make even Japan a doubtful destination for U.S. LNG. And, what if U.S. prices rise significantly above $6?

But all this presupposes that the United States will have excess natural gas to export. As my colleague Jeffrey Brown has pointed out, "Citi Research [an arm of Citigroup] puts the decline rate for existing U.S. natural gas production at about 24%/year, which would require the industry to replace about 100% of current U.S. natural gas production in four years, just to maintain current production."

It seems that U.S. drillers are going to be very, very busy just keeping domestic natural gas production from dipping, let alone expanding it to allow exports. And remember, we are still importing the stuff today!

How many companies will actually risk the billions needed to build U.S. natural gas export terminals to liquefy and load exports that may never appear? I doubt that very many will actually go through with their plans.

What is truly puzzling is that all the information I've just adduced--except the cost of liquefying, transporting and regasifying natural gas--is available with a few clicks of a mouse and a little arithmetic performed on tables of data. I got the cost information on LNG from a money manager specializing in energy investments. And yet, commentators, reporters, and editorial writers don't even bother to check the internet or call their sources in the investment business.

Perhaps the facts have become irrelevant. Only that would explain the current hoopla over the nonexistent U.S. oil and natural gas "weapon" in the face of the all-too-obvious and readily available evidence.