What Will Washington Want in 2013?

Issue 1 and Volume 117.

alt   By Barry K. Worthington, Executive Director, United States Energy Association

It’s January. A second term for President Obama begins on Inauguration Day, Jan. 21, 2013. Issues impacting the power generation business are plentiful. Issues impacting the broader energy industry multiply in complexity.

Financial issues are of paramount importance. The combination of annual federal deficits and mounting national debt will be near crisis-like on a continuing basis, likely for the rest of the decade. Our industry will come under fire because it is so large and important to the rest of the economy.

Economists are talking about the potential for a carbon tax, not to combat climate change, but as a fiscal measure. All corporate dividends are threatened with increases, as are capital gains – both critically important to energy investors. Tax credits, treasury grants, production tax credits for renewables, every conceivable incentive for energy sector investments will be reviewed and many eliminated.

Final rules for the Environmental Protection Agency regarding the Clean Air Act are forthcoming, including greenhouse gas regulations. No signals have been given to suggest flexibility on the part of the U.S. Environmental Protection Agency.

Energy exports from the U.S. may be threatened. Coal exports are expected to increase as domestic consumption declines. Abundant and inexpensive supplies of natural gas, largely due to unconventional production in shale plays, can be exported to countries with free trade agreements. This can easily expand to NATO allies and to other nations, including Japan and China.

Perhaps equally important is the potential for international benefits. Balance of trade is improving. Already, declining petroleum imports are reducing U.S. trade deficits. Instead of crude imports providing up to 70 percent of domestic consumption, imports are now below 50 percent and headed lower. Discussions of U.S. energy independence or North American energy independence are real. From a balance of trade perspective, becoming a net energy exporter is the important dimension.

Exports of natural gas via Liquefied Natural Gas can contribute enormously to this goal. Exporting coal, refined petroleum products and LNG collectively contribute to the U.S. becoming a net exporter, perhaps by the end of this decade.

Falling crude imports and exporting refined petroleum products are reshaping the geo-politics of global oil markets, and exporting natural gas can help reshape global gas markets. Reducing Europe’s reliance on Russian gas and reducing Asia’s dependence on mid-east gas, can contribute to global security. One only needs to reflect on the continued chaos in the Mid-East to recognize that energy security is national security.

We would react very negatively if a country chose not to export its energy resources to the U.S. I recall this happening twice in the 1970’s. Americans were not happy campers during either oil embargo. Don’t we have an obligation to our friends and allies to share our abundant and low cost domestic energy resources?

Another critically important industry development will be how Washington deals with CCUS, or carbon capture, utilization and storage. Enhanced oil recovery is the primary “use” for CO2 today. Larger economic values from producing additional volumes of domestic petroleum drive the urgency of CCS for EOR.

Defying predictions, U.S. greenhouse gas emissions are falling. Decreases are due to switching from coal to strides in energy efficiency and, of course, the recession. Europe has suffered from the recession as well, yet European emissions have increased. Future reductions are likely from efficiency gains and fuel switching, but each will have limits to possible reductions.

Globally, we are losing time to commercialize CCS. Eventually, there is a strong likelihood that a global agreement will exist to reduce greenhouse gas emissions. No credible expert believes that the level of emission reduction expected (80 percent in the U.S.) can be achieved without deploying CCS on every fossil fuel generating plant. And the expectation is this occurs by 2050.

Industry, with very significant government cooperation and funding, has demonstrated that CCS works. And the experience with enhanced oil recovery is measured in decades. Combining both in a large integrate project is the next step. Several projects are underway, but additional demonstration projects are needed to give investors confidence.

Revenues for selling CO2 to EOR projects provide near-term revenue streams to project developers. Most U.S. CCS projects on the drawing boards are CCUS projects utilize the CO2 for EOR.

Even with revenues from enhanced oil recovery and sales of electricity, many CCUS projects will need additional revenues in short-term to adequately demonstrate technologies. Policy-makers will need to become creative to push for CCS commercialization in an era of financial distress. Washington’s financial mess will not be solved overnight, but the urgency of demonstrating CCUS can’t wait much longer.