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Ukraine, Russia and the nonexistent U.S. oil and natural gas “weapon”

Public Policy

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.

Resource Insights

18 Comments on "Ukraine, Russia and the nonexistent U.S. oil and natural gas “weapon”"

  1. DC on Sun, 9th Mar 2014 9:56 pm 

    Yes, very sensible. Of course, in an empire built on war, everything is weaponized isnt it? Even the Us’s un-natural gas and its non-existent ‘bounty’.

  2. rockman on Mon, 10th Mar 2014 1:03 am 

    I have an easier and immediate solution to helping our Ukrainian cousins out. Very simple: during 2013 the US imported about 90 bcf of LNG. All we need do is have it all shipped to the Ukraine. And since we still import more than 7 million bopd we can also divert as much as the Ukraine can afford to buy.

    See…problem solved and we didn’t have to export one bbl or one cubic foot. And even better: we don’t have to help the Ukraine to pay for it. Their kindhearted EU neighbors, like Germany, can lend them a hand.

  3. Makati1 on Mon, 10th Mar 2014 1:25 am 

    It really is a shame that the US has slipped so far down the intelligence/education ladder that few even question articles that are obvious lies, such as we have been seeing about the ‘excess’ oil and NG that the 50 Police States has to export.

    It is now ‘in’ to bash Iran, China and Russia as they are the last great countries left that the US has not subjugated to the Bankster Cartel …ie … the elite. Anyone who doesn’t see this blatant propaganda for what it is should have their vote taken away. Not that it counts for much anyway. Just another pacifier for the sheeple until they are ready to do away with democracy even in name.

  4. jeep on Mon, 10th Mar 2014 1:40 am 

    Rock, Germany doesn’t give a sh*$ about Ukraine. In theory, Ukraine could decide to mark up every MCF of Russian gas moving through their country towards the EU. Germany will happily collaborate with Russia in screwing the middleman. (At least with Poland 1939, they did it more manly-like).

    Stuff is fungible. And we have a lot of weird geography given our two coasts, Hawaii, Alaska, Panama Canal, etc. So if we decide to start exporting, no reason to cut off imports. Just like with Canada and Mexico, we have both imports and exports.

    But if we start importing to the world (and especially to Europe), it will end up having an impact. Right now, the US gas production is captive. Nowhere to go. I have heard that the supply curve is very flat, given the shale reserves, so that if we allowed exports, that significant capacities of gas could be exported to the world markets with price staying under 6. And yes, of course, price WILL rise.

    Oil would have less of an impact, but still beneficial to light crude pricing in the US (and thus to increased production) if we allowed shipments and conracted the WTI-Brent spread. And for the crude especially, just send it wherever (hopefully not to Ukraine, worried about them paying their bills).

  5. Northwest Resident on Mon, 10th Mar 2014 3:15 am 

    “It is now ‘in’ to bash Iran, China and Russia as they are the last great countries left…”.

    As he takes the opportunity to bash America yet again.

    Makati — Russian business is heavily infested with mafia, government too. The Russian mafia is everywhere — the mafia ARE Russian business in many cases. China is all shadow banking, in debt by trillions — maybe the reason you think China is so great is because China censors its people and shuts down people who complain openly, so you don’t hear the really bad news. Religious fanatics run the show in Iran. And you’re singing their praises?

    I don’t understand your obsession with bashing America, Makati. What happened to make you hate America so much?

  6. Northwest Resident on Mon, 10th Mar 2014 5:24 am 

    Makati, not trying to pick on you, but I just hate to see you so deluded about China.

    “”Total Chinese banking assets currently stand at some CNY147 trillion, around 2 times GDP. As such, they have doubled in the past four years of increasingly misplaced investment and frantic real estate speculation, adding the equivalent of 140% of average GDP — or, in dollars, $12.5 trillion — to the books. For comparison, over the same period, US banks have added just less than $700 billion, 4.4% of average GDP, 18 times less than their Chinese counterparts — and this in a period when the predominant trend has been for the latter to do whatever it takes to keep commitments off their balance sheets and lurking in the ‘shadows’!

    “China’s $23 Trillion Dollar Credit Bubble Is Bursting. International Business Times noted last year that China’s debt-laden steel industry was on the verge of bankruptcy.

    Quartz reported in December that a huge coal company called Liansheng Resources Group declared bankruptcy with 30 billion yuan ($5 billion) in debt.

    Chinese Business Wisdom argues (via China Gaze) that waves of bankruptcies are striking in 10 Chinese industries: (1) shipbuilding; (2) iron and steel: (3) LED lighting; (4) furniture; (5) real estate development; (6) cargo shipping; (7) trust and financial institutions; (8) financial management; (9) private equity; and (10) group buying.”

    www dot opednews dot com/articles/China-Is-Crashing–As-Pr-by-George-Washington-China-Politics_China-Top-Economy-2030_Default_Financial-140309-857.html

  7. westexas on Mon, 10th Mar 2014 12:18 pm 

    I’m fascinated by the widespread discussion in the media in regard to how exports of US oil and natural gas to Western Europe could reduce Western Europe’s dependence on energy imports from Russia. Of course, one small, itsy-bitsy, tiny little problem is that the US is a net importer of both crude oil and natural gas. But why let a fact like that get in the way of a good story?

    The most recent four week running average data showed that we net imported about 48% (7.3 mbpd) of the crude oil processed daily in US refineries (15.2 mpbd). However, I think I have a solution as to how we could reduce Western Europe’s dependence on Russian oil. The US could boost crude oil imports from Russia by 2 mbpd, and if we could change the US law on crude oil exports, the US could then export 2 mbpd of crude oil to Western Europe. Problem solved!

    In any case, if we assume a (conservative) estimate that the underlying decline rate from existing US oil production is about 10%/year, then in order to just maintain current US crude oil production for 10 years, we would have to replace 100% of current US crude oil production over the next 10 years. Or in round numbers, based on the foregoing, just to maintain the current US crude oil production rate (7.4 mbpd in 2013) for 10 years, over the next 10 years we would have to replace the productive equivalent of the combined 2012 crude oil production from Canada + Mexico + Norway

    On the natural gas side, Citi Research estimates that we have to replace 100% of current US natural gas production (66 BCF/day in 2013) in about 4 years, just to maintain current US natural gas production for 4 years. Or in round numbers, based on the Citi Research estimate, in about 4 years–in order to maintain a production rate of 66 BCF/day–we need to replace the productive equivalent of the combined 2012 dry processed natural gas production from: Iran + Qatar + Canada + Norway + Netherlands.

  8. robertinget on Mon, 10th Mar 2014 1:35 pm 

    What’s an obvious fib to serious energy investors like westexas and others, escapes political operatives looking to blame the Obama Administration for “losing Ukraine” or denying freedom to export.

    In this ‘transition period’ between actual journalism and cut and paste
    opinion, anything goes.

  9. Makati1 on Mon, 10th Mar 2014 2:44 pm 

    NWR, deluded? Me? LOL. All you know about Chins is what the financial elite want you to know. And, did you ever think about the fact, that if China is going to fail. that it will take down the US fiat system with it? The number one trading country will affect the whole world if it collapses. I doubt that is going to happen, much as the West would like to see it’s major rival fail. If it goes, all of the US owned factories/corporations located there, are going to fail right along with it. So, where the crash starts isn’t really important. The world is too interconnected and China is too big a domino to not affect the rest of the world.

    And, a failing country is a most dangerous animal. Especially a nuclear armed one, like the US or Russia. China is in no worse situation than the US or the EU. All are subject to collapse at any time. So, yes, I do think China will manage its problems. They are not stupid.

    As for US bashing … I’m only pointing out the truth about one of the most corrupt governments in the world. The best money can buy. A democracy in name only as it’s citizens are going to soon realize.

  10. Davey on Mon, 10th Mar 2014 2:56 pm 

    Makati , come on, don’t belittle us here with your claim we are snowed by the financial elites it doent hold up. So what are you saying this site here is a sham? If so why are you here? I know why so you can bash the US. ProbBly because you grew up unhappy in America. That is no excuse to bash a country. I could bash your current home all day long!

  11. J-Gav on Mon, 10th Mar 2014 4:35 pm 

    Re: the article – Cobb’s key point rings true i.e. the U.S. has no secret weapon up its sleeve in the Ukrainian situation.

    Re: the comments – Country-bashing, based on nationalism, is a stupid, counter-productive approach to world affairs. Well-founded criticism of any given country’s policies, on the other hand, is something I welcome. E.g., if somebody says “dumb Amerikkkans” are responsible for all the world’s ills, it only shows their lack of analytical depth. But if somebody says: “This or that country has some serious problems which need to be addressed urgently,” and adduces facts to support that view, I’m all for it.

    Makati makes the point that our financial elites have too much power. That’s correct. Whether it extends to limiting what we can or need to know about China is another question …
    When the 85 largest fortunes on the planet possess as much wealth as half the world’s population, well yes, there is a god-damn problem with our financial elites!

    I’ve never been one to vilify any country’s entire population because of the idiocy/greed/abuse of power of their rulers. The common man everywhere wants basically the same thing: enough income and social stability to raise a family decently and get on with their lives. There are plenty of bright lights in North America, Russia, China etc who understand this but the old ‘them vs us’ hyper-competitive propaganda still holds sway because the elites control the media. Let’s not confuse ‘normal people’ with the corrupt, imperial or bellicose inclinations of TPTB.

  12. shortonoil on Mon, 10th Mar 2014 4:44 pm 

    The hyperbole cast about by the MSM about using NG as a weapon, US energy independence from shale, the US becoming a net oil exporter, and etc., etc. is bought and paid for promotion by the shale industry, and the middle men who process, and inventory it. The media is 98% owned by three conglomerates, and their only concern is their bottom line. If they were paid enough by someone they would launch a campaign to convince the American public that the moon really, really is made out of green cheese. The last thing the media is going to let get in the way of producing black numbers on their balance sheet is the facts.

    The problem is the shale industry, or more specificity the condensate industry. Condensate is a single phase gas in the well that produces a lot of the lighter fractions of hydrocarbons, and not very many of the valuable heavier fractions. It produces a lot of methane, ethane, butane, and pentane. Methane (dry gas), ethane, butane are gases, and so they can be exported as NGLs. Pentane is a liquid at standard pressures, temperatures so comes under the crude export ban. It is not particularly valuable, having only a very limited market as a diluent and feedstock, and the Gulf Coast has a horrible glut of the stuff.

    Now, if you can convince the American public (that includes Congress) that the US is now fossil fuel rich beyond its wildest dreams, that there is a chicken in every pot, and that Tinkerbell is coming with bags of gold, you may get them to lift that silly old export ban so they can ship all that junk to Japan. Of course there are a few other stakeholders in the game. The big banks who are financing the shale industry, the White House who wants everyone to believe they are doing a terrific job of managing the country, and Halliburton who provides the oil services (and who would sell their grandma for a quarter if profits were down).

    Now you understand the “Wonders” of shale! Stop by and see us sometime!

  13. baptised on Mon, 10th Mar 2014 4:58 pm 

    Cannot the same be said about a monetary bailout. Where going to give Ukraine 1 billion dollars, while were 14 trillion in debt?

  14. rockman on Mon, 10th Mar 2014 5:32 pm 

    jeep – That’s why I threw Germany into the mix. But I would say the give a big sh*t about the Ukraine…but not in a good way. Neither the Russians or the Ukrainians are Germany’s friend. It’s more a question of which one will be a bigger thorn in Germany’s side IMHO.

  15. rockman on Mon, 10th Mar 2014 5:51 pm 

    Baptized – Actually over $16 trillion…make you feel any better? LOL. But the real debt number takes on different meanings depending on how one defines it. Here’s one view:

    “The national debt is made up of publicly held debt and money that the government owes to itself. The $16+ trillion number is this “gross debt” figure. About $11.5 trillion is public debt and the rest comes from bonds held by Social Security, Medicare and other trust funds. You can have an endless debate about whether these bonds are real or not but ultimately these are obligations that must be paid with either new debt or general government funds, thus taking away from other programs. There is also dispute over whether gross debt is really the best picture of the U.S. debt load, as economists often focus mostly on publicly traded debt.”

    And with respect to giving our money away overseas: While polls indicate that many Americans continue to believe that foreign aid is a large part of government spending, it actually constitutes less than 1 percent of the budget.

    OTOH there’s also a great deal of debt in the US that isn’t classified as “debt”. And those are the obligation payments that run from Social Security to $trillions in unfunded pension plans. Long ago the govt and its citizens decided the growth in debt/obligations wasn’t critical as long as we can pay the interest. Of course that philosophy is based on the idea that those making this decision won’t be around when the interest gets too high to pay or, Dog forbid, we have to start actually paying off the principle.

  16. Nony on Mon, 10th Mar 2014 7:19 pm 

    I think when we start shipping gas, it should go to the highest bidder.

    1. Make more money that way.

    2. More likely to keep sustainability of these early ventures, to drive more of them. Need to go for the lowest hanging fruit to be more sure of success. Rather than loading down a huge capital asset bet with some political/economic costs.

    3. Although the gas market is very far from global (huge differentials), it is possible to imagine it growing more fungible with time. Any export helps that.

    4. The saved swimmer quickly resents the life guard. (Learned this in Somalia, Balkans).

    5. Let’s wait and let the Euros ask us for gas shipments rather than pushing them. You know…walk down and f$%& all the cows. 🙂

  17. Nony on Mon, 10th Mar 2014 7:30 pm 

    And in terms of energy policy, we have to realize that this is something that is like steering an ocean liner. Takes a long time for the rudder order to have an effect. So some drop in the bucket shipment on TV has no substantial effect. However, if we can take actions that reduce the world price of oil and the European price of gas, this has profound effects on Russia and for Putin given his reliance on hard currency for oil and gas and how he has asserted control over those industries.

    In the 1980s, relaxing tax hurdles and price controls and the like allowed more US drilling. This, even though just a small wedge…was important in prying OPEC apart and into cheating. And we had 20 years of low prices and ramped production.

    I don’t know if it’s possible with oil (maybe we finally are in POD), but perhaps the same effect could happen if we approved Keystone, expedited drilling on Federal lands, opened up the 85% of offshore that is off limits, etc.

    In any case, gas really is a place where have huge abundance and approving export liberally should be allowed. Yes, US price will rise a little, but we will gain the $$ from export. Also US users will still enjoy lower than world pricing because of the costs of compression and expansion involved in shipping to other continents.

  18. J-Gav on Mon, 10th Mar 2014 9:08 pm 

    Shorton – On that 1% of the budget for foreign aid. Yep, but even that has strings attached … as in, as long as you use it to buy our airplanes etc … or else! Is that America-bashing? No, just telling it like it is.

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