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October 2013
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Keystone is Key to Energy Renaissance

By Tim Triplett, Editor-in-Chief

“I want you to understand that this is a big idea. This is a transformational idea. It’s extremely important, not just for your business but for the future of this country,” said Lucian Pugliaresi, president of the Washington-based Energy Policy Research Foundation, who addressed the fall meeting of the National Association of Steel Pipe Distributors Sept. 20 in Chicago.

Issuing a call for advocacy in support of the controversial Keystone XL project, Pugliaresi was critical of the Obama administration and its reluctance to approve the proposed pipeline designed to transport crude oil from Canada to refineries on the Gulf of Mexico. It has been five years since the pipeline was proposed and it remains stymied over political and environmental concerns that are completely unfounded, he said. “If you take five years to decide something as rational as Keystone XL, you’ve got a problem.”

The burgeoning North American petroleum renaissance is a product of new drilling techniques in the shale formations that lie under much of North America. Hydraulic fracturing and horizontal drilling to extract oil and natural gas from these unconventional shale formations is both a science and an art, Pugliaresi said. In conventional oil exploration, drillers attempted to hit pockets where the oil has pooled deep underground after migrating from the source rock. Unconventional drilling extracts the oil and gas directly from the source rock. “They are no longer drilling dry holes. There is no dry hole risk anymore.”

How much oil and natural gas the shale plays yield is a matter of how rapidly the market develops. “Everywhere there is source rock, there is oil and gas. Its extraction is a manufacturing process. The only limit to production is how rapidly the technology advances. It’s a manufacturing process that is driven by technology and by policy.”

Referring to U.S. Energy Information Administration data on natural gas imports, he noted that in 2008 everyone in government and industry believed the U.S. would continue to import 3-4 trillion cubic feet of natural gas every year for decades to come. The industry built $30 billion in LNG facilities so it would have the infrastructure to handle high levels of liquid natural gas imports. Much has changed in the past five years. Current forecasts show that not only will the U.S. quit importing natural gas, it could become a net exporter of natural gas within the next several years. “That is a remarkable turnaround, driven by people like you who understand the technology,” he told his audience of steel pipe distributors.

Not all the gas comes directly from shale gas production. Some is a byproduct of oil extraction, referred to as associated gas. “If you go out 5-10 years, 30-40 percent of natural gas in the U.S. will be associated gas,” he estimated.

Pugliaresi’s Energy Policy Research Foundation forecasts that unconventional drilling of crude oil in the U.S. will grow to nearly 5 million barrels a day by 2020 from the current 3.5 million barrels. Total crude oil production in the U.S. is forecast to jump from about 8 million barrels a day to over 9 million barrels in the same time frame. U.S. and Canadian production combined, not counting natural gas liquids, is forecast to total nearly 14 million barrels a day. Including natural gas liquids takes the total up to about 18 million barrels a day. “The outlook is pretty positive,” he noted.

Keystone XL is not just an issue for the United States, but for Canada, as well. “It’s important to think about the energy renaissance through a North American lens,” he said. “The Canadians are committed to this production, but it has to get to market.”

Canada is America’s leading trading partner. Compared to oil countries in the Middle East and other parts of the world which face a constant threat of turmoil and social unrest, Canada offers a politically and economically stable platform. “Having them as a new production source in the world is a tremendous benefit to our strategic outlook,” Pugliaresi said.

Both Canada and the U.S. have relatively flat energy demand forecasts, so any incremental production of oil and gas will come right out of imports. “We are rapidly driving out all waterborne imports into the United States,” he said.

Historically, oil was produced and refined in the Gulf region, then shipped northward into the midcontinent. Today, the oil is produced in the midcontinent and needs to get to the refineries. “We have this surge of production in the northern tier that has got to get to the coastal refineries. We have to build the pipe. But we have a policy system that is broken.”

Canadian energy companies are reluctant to step across the border and get drawn into the U.S. political fray. “They say they are not going to propose anything and get dragged through the mud like XL. It’s not worth it.”

TransCanada purchased the pipe for Keystone XL two years before regulatory approval on the expectation that no president would deny a cross-border pipeline, because it had never happened before. Now, no pipeline company will ever preorder pipe again because it’s too risky. The damage from the way Keystone XL has been handled has corrupted the process and caused sustained damage to the U.S. economy, Pugliaresi said.

“If you want the renaissance to happen, you’ve got to move the crude to the coastal refineries, and you need pipe to do that,” he continued. Without pipe, the material must move by rail and truck, which will play a role, but that will cause bottlenecks at various choke points that will only add to the cost.

Keystone XL alone would raise wellhead values in North America by $3 billion a year. That’s $3 billion a year just through efficiencies in transportation. That’s a lot of federal, state and local taxes and royalties that the Canadian and U.S. governments stand to take in if the project gets the go-ahead, he said. “Here is something that could transform the country and make an enormous economic difference, and five years later we are still debating.”

Forecasting the average relative manufacturing cost in the major developed countries in 2015, low-cost energy will make the U.S. the most competitive market in the world in which to produce manufactured goods, with the possible exception of China. “The U.S. is now poised for an enormous manufacturing renaissance, but it is not going to happen if we don’t get the policy right,” he said.

Much of the pipeline is completed, except for the portion that requires presidential approval. Industry appeals to the Obama administration continue to be drowned out by opponents fearful of oil spills that might damage the water supply and the long-term environmental effects of burning fossil fuels.

“Had it not been for the increased production we have had since 2008, oil prices would be $20-$40 higher than they are today, and instead of anemic economic growth we would be in recession. There is a disconnect between the reality of what this can do for the country and the public debate,” he said.

Asked if he believes Keystone XL will ultimately be built, Pugliaresi remains modestly optimistic. “The numbers just make too much sense. You can’t defend this decision to hold up XL. You can’t find any rational, even environmental reason, to defend it,” he asserted.

[“The numbers just make too much sense. You can’t defend this decision to hold up XL. You can’t find any rational, even environmental reason, to defend it.” Lucian Pugliaresi, Energy Policy Research Foundation]
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