Technology and global competition are profoundly impacting our energy future. The evidence is all around us in wind and solar energy advances, horizontal drilling and hydraulic fracturing creating a new North American oil and gas boom market, and the technologies driving smart grid, microgrids, and constant energy management. What are the forces of change taking place in energy today?
- Global competition for energy resources from emerging economies like China
- Struggle over energy policy and greenhouse gas emissions around the world
- Growth in unconventional oil and gas from shales and oil sands
- Uncertainty of environmental regulations forcing power plant retirements
- Game changing technology from smart grid is turning the energy industry on its head
Global Energy Competition
Global Energy Competition is being driven by fast growing emerging markets like China and India with faster economic growth than the West and exports driven quest for lower cost manufactured goods to keep growth going. Faster Asian growth and lower costs have suctioned up North American and EU manufacturing and sometimes dumped product onto our markets at prices lower than domestic producers. That is the basis of the current complaint by domestic solar panel producers against China. This is what happened in Spain, Germany and across EU with feed-in-tariffs as China took market share from EU manufacturers of PV panels forcing them to dump their inventory on the market in a desperate effort to stay afloat. The glut of PV panels haunts the solar industry still.
In North America today with falling price PV panels and wind turbines from China keep exports growing that China needs until its domestic markets growth enough to absorb more of the domestic manufacturing output. China’s export production requires vast amounts of energy and raw materials so it scavenges the global markets to buy up resources. This erodes margins and profits for domestic manufacturers unable to compete with low prices for imports.
This insatiable demand for energy gives cartels like OPEC and Russia control over conventional oil and natural gas prices in global markets since they control the swing capacity in production. The less swing capacity the higher prices and commodity traders increasingly use this natural volatility in the markets to game the system as a substitute for the stock market.
Struggle over Energy Policy
Canadians were shocked at President Obama’s decision to reject the Keystone XL Pipeline. Is this just politics in an election year in America? Yes, the decision to reject Keystone was caused by the competing pressure on President Obama from environmental groups that have been one of his most important constituencies and labor unions who favored the projects because of it high wage job creating potential. The President tried to postpone the decision until after the election but Republicans made it a cause célèbre and thus made it worse by forcing the President’s hand so he rejected the pipeline on procedural grounds and invited the pipeline sponsors to re-file and comeback after the election.
Why is Keystone so important that it causes all this controversy? For environmental groups opposed to Canadian oil sands development or opposed to more fossil fuel development, Keystone is seen as an enabler of bad policy. For the energy industry, Keystone represented —pardon the pun—a keystone to the important changes in how the oil and gas infrastructure of North America is being transformed by the phenomenal growth of unconventional oil and gas from tar sands and shales.
Keystone ended up being even more important as a symbol of the integrity of the long standing US/Canadian partnership and a defining political issue in the 2012 campaign. Rejection of the Keystone project undermined prospects for bringing Canadian oil sands to the underutilized Gulf of Mexico refining, storage and export facilities. That infrastructure has been hurting for business with the moratorium and Federal slowdown in permitting new Gulf projects after the BP oil spill.
Unfortunately for President Obama, the Keystone decision frames an energy policy issue for the 2012 election he wanted to avoid—and it forced Prime Minister Harper to book a flight to Beijing to demonstrate that Canada is not dependent upon the US for export of its oil sands.
Growth in Unconventional Oil and Gas
Conventional oil is the term used for the traditional or conventional method of extraction by drilling a vertical well into a large underground reservoir of oil or gas and suctioning it out for refining into findings products. For much of the last 100 years this is the way oil was extracted and the OPEC cartel was formed to control world prices for these large oil reserves.
Unconventional oil and gas refers to the deposits that were hard to reach or were uneconomic to produce with conventional technology. In America in the 1950’s wildcatters from Mitchell energy and Devon Energy began experimenting with new horizontal drilling techniques that allowed access to these thin ribbons of oil and gas running horizontally for long distances rather than gathered in large pools where a vertical drilling rig could reach them. Getting the oil and gas out of these horizontal ribbons or streams was difficult and costly until these wildcatters began to use a technique called hydraulic fracturing to pump a combination of water, sand and lubricating chemicals into the well sites to help open up the porous rocks enough to extract their treasurers. Oil sands found in large amounts in Alberta are thick bitumen crude and the process of extracting the petroleum products involves heating the bitumen and expressing the product from the porous soils. It is more energy intensive but technology is also making it more economic to produce especially if pipeline, storage and refining infrastructure already existing can be used to bring it to market.
Why is unconventional oil and gas so important? It all goes back to global energy competition. China, India, and other emerging markets have such insatiable appetites for energy that they are buy up and driving up the prices for oil, metals and other commodities needed to feed their export economies. That means they are driving up the price in global markets we must pay when we import oil or other energy resources.
Higher oil prices are a drag on our economic recovery and growth and it makes us more dependent upon Middle East, Nigerian or Venezuelan oil in US markets, Russian gas or Iranian oil in Europe and resources from other places in the world that are volatile or unfriendly. As our conventional oil and gas resources are depleted we are forced to import more from these regions to make up the difference.
Over the past ten years that growth fully offset the depletion from our domestic conventional oil and gas resources. The United States became a net exporter of natural gas for the first time in a generation in 2011 as a result of this growth.
The struggle over energy policy between politicians and the markets is testing our integration and energy partnership. US/Canadian energy partnership and integration is good policy and better defense. Canada has vast energy resources but the logical markets for those resources are in the US. Over time, the oil and gas interstate pipeline system linked our two countries in ways that made good business sense and good public policy sense. The citizens in both nations broadly support clean energy goals and environmental protections so our interests have been harmonious. By optimizing infrastructure and balancing supply and demand between us we made our economies more robust, our markets more transparent, and our nations more secure.
Uncertainty of Environmental Regulation
Global policy issues like greenhouse gas emissions reduction, carbon taxes, renewable energy and the industrial policies of feed in tariffs, renewable portfolio standards and tax subsidies to advance policy preferences all cause heartburn and unintended consequences.
In EU France favors nuclear but the Germans oppose it. Germany favors Russian gas imports but Poland and the former Warsaw pact nations fear dependence on Russia and its willingness to cut them off in mid winter at will.
Kyoto Protocol was supposed to reduce greenhouse gas emissions but the emerging economies refused to sign on and the developed world cheated. The Copenhagen Conference to find a compromise global warming solution failed when China, India and other emerging economies refused to agree to limits to emissions that hurt their economic growth.
The practical reality for the US, Canada and Europe was that we could shut down all of our power plants and industrial emissions bankrupting our economies and still not be able to offset the emissions growth from China, India and other faster growing emerging economies unwilling to cooperate.
The US Congress rejected President Obama’s cap and trade legislation but the President is trying to impose environmental regulations that seek to achieve many of the same goals but is meeting fierce resistance. This is the context for the Keystone pipeline rejection and the 2012 political debate in America.
Game Changing Technology
Horizontal drilling and hydraulic fracturing are disruptive innovation technologies that make possible this phenomenal growth in oil and gas E&P from shales. These technologies are not only bringing North America out of our economic slump but they set the stage for a return to industrial production and job growth from low natural gas prices.
Wind and Solar renewable energy technologies are transforming the utility business model from its traditional central station generation model of large baseload plants into a cleaner, more distributed energy business model with many more market participants. The result is not only more wind and solar resources but other advances such as microgrids, combined heat and power in industrial settings and nets zero buildings striving to produce what they consume.
Smart Grid is more than smart meters. It is bringing two way communication, network communications architecture, sensors, power electronics and self-healing machine learning technologies to optimize the power grids.
Operations and Compliance Technology. Technology is giving us tools we could not even imagine just a few years ago. Information access will also produce better policy as well as better energy field performance. For Example, my company Tech and Creative labs partners with a Calgary firm called HotButton Solutions to provide remote data gathering and synching technology available not just in the Alberta oil Patch but across the wider market for unconventional oil and gas. The product not only gives the field crews access to all the critical information about a well site they need but it tracks inspections, records temperature and pressure readings and alerts the field crews when anomalies from normal operating patterns appear to prevent outages or environmental accidents.
Recently, the Alberta Energy Minister was quoted in the Calgary Daily Herald calling for a new compliance monitoring solution to keep track of the growing number of wells at work. This is the power of adaptive technology change at work. In many cases, adaptive re-use of existing technology for new purposes creates the innovation we need to take the next step for growth, environmental protection and profitability. So I hope Energy Minister is reading my blog today because I have a solution for her.
Will we have higher energy prices or lower prices? The honest answer is we will probably have both depending upon how global energy competition and energy policies affect the natural boom and bust cycle of the energy business.
The continued growth of unconventional oil and gas is our best hope for lower energy prices. The early focus on unconventional gas production on shore in Texas and now spreading across North America has boosted domestic supply so much that is has decoupled natural gas prices from oil prices and turned the US into a net exporter of natural gas.
Global oil prices are still persistently high at around $100 per barrel. They are subject to wild volatility from potential conflict in the Middle East and with Iran. Commodity traders and speculators use oil as a substitute or hedge against stock and bond market fluctuation. But unconventional oil production is growing as North American E&P shifts in the face of excess supply and lower natural gas prices to produce more oil that can be sold at higher prices. These natural market forces will bring more domestic oil supplies to market and should over time have a moderating impact on oil prices when enough unconventional plays are developed around the world to reduce the influence of OPEC by increasing the swing productive oil capacity available in global markets.
US Canadian Partnership in Energy is more important than ever. By leveraging our assets, resources and infrastructure the Us and Canada can both rev up our economic growth through domestic energy production and exports as well as improve our global energy security thus insulating ourselves from the bad boys in the Middle East and other neighborhoods seeking to harm us.
Creating a low price, pro growth domestic energy environment is also the fastest way to live into the clean, distributed energy economy our policymakers say they want. The rebirth of manufacturing will bring new jobs and new demands for infrastructure that will speed the development of renewable energy, the substitution of cleaner natural gas fired power generation from coal, and more rapid advance of smart grid power grid optimization. A rising tide lifts all boats and will make us more energy secure, more environmentally responsible and more economically competitive.
What about these energy wildcards?
Keystone is a symptom not a disease. If US and Canadian politicians cannot find common ground to reassure the markets that our energy cooperation and integration is mutually beneficial, sustainable and profitable we both have a big problem. The way forward will be muddled until after the US 2012 election.
Conflict with Iran or Syria. Volatility in the Middle East will still spike oil prices and whipsaw the North American economy. There is no downside to faster, stronger, larger domestic energy production of oil and gas.
NIMBY is a nuisance we all must face. It can slow down pipelines and electric transmission projects but policy clarity and market forces are the best defense.
EU financial crisis. North American financial and equity markets are still vulnerable to the uncertainties in Greece and elsewhere as the EU faces it eurozone issues. Oil prices could spike if oil is seen as a safer haven than stocks or bonds, but oil could plunge if a recession is triggered or a default creates a more profound crisis on fears that economic activity and energy demand will fall along with the economy.
- Keystone XL is Politics XL (insightadvisor.wordpress.com)
- New Energy Realities: A Low Gas Prices Scenario (insightadvisor.wordpress.com)
- My 2012 Predictions (insightadvisor.wordpress.com)
- Mergers and Market Competition Separate Energy Princes from Regulatory Frogs (insightadvisor.wordpress.com)
- Canada to US: You are Not the Only Hot Date for Keystone XL party! (insightadvisor.wordpress.com)