Oil sands: an "unconventional" oil resource

New technologies enable the production of petroleum from unconventional oil resources such as "tar sands" and oil shale.  While traditional oil wells have been drilled for over 2,000 years, unconventional resources offer the opportunity to develop new petroleum sources - and by extension, to shift the balance of power and economics away from traditional sources.  At the same time, producing oil from oil sands may have environmental impacts that are different from traditional wells.  What are tar sands or oil sands?

Oil sands, also known as bituminous sands, are loose sand or partially consolidated sandstone saturated with a dense and viscous form of petroleum technically referred to as bitumen.  Oil sands are often called "tar sands" due to bitumen's sticky, dark nature.  ("Tar" technically refers to a product made by distilling pitch from the wood and roots of pine trees, and was historically used to describe the sticky black residue left behind when distilling coal gas.) 

Bitumen is so viscous that it cannot be pumped directly from the ground through traditional wells.  Oil sand deposits are typically mined using open pits or strip mining.  The mined material is mixed with water at an extraction plant, where the bitumen can be separated from the remaining minerals, sand, and water.  The bitumen can then be transported for upgrading or conversion into synthetic crude oil.

Alternatively, bitumen can be extracted by heating the raw sands in place.  In-situ production methods include injecting steam or solvents, or piping in oxygen and igniting some of the bitumen.  These methods rely on the use of large amounts of water and energy.

According to the U.S. government's 2012 oil shale and tar sands programmatic environmental impact statement, about two tons of tar sands can produce one barrel of oil.  Extraction and processing typically require several barrels of water for each barrel of oil produced.  Some of this water can be recycled.
About three-quarters of the bitumen can be extracted from the raw material.  Spent sand and other materials are typically returned to the mine after processing.

Producing oil from bitumen derived from tar sands can have significant environmental impacts.  The mining and upgrading processes are energy-intensive and result in emissions of greenhouse gases and air pollutants.  Mine sites are typically significantly disturbed, and impacts to water may be both local and throughout the downriver watershed.  The association between the proposed Keystone XL pipeline and oil sand resources in Alberta, Canada led to environmental opposition to that pipeline.

Producing oil from oil sands may be controversial, but Canada possesses the world's largest known resources and is developing them rapidly.  Canada points to environmental regulations and controls, as well as economic development benefits.  Developing oil sand resources creates jobs and economic growth, and mine sites are typically in rural areas eager for opportunity.  If the U.S. does not approve the Keystone XL pipeline, Canadian producers may push for an alternative route to refineries or export terminals in British Columbia, obviating the need for U.S. approval.

Economically, synthetic crude oil produced from oil sands bitumen can be cost-effective if the price of oil produced from traditional wells is high.  On the other hand, if oil from wells or other unconventional resources like oil shales can be produced cheaply, oil sands may not be economically competitive.  The significant capital investment required to produce bitumen from oil sands means that producers must often make long-term investments that risk losing money in some years.  Producers may also face the risk of tighter environmental standards, the cost of compliance, and any penalties for noncompliance.

Energy, environment, and the 2013 inauguration

This week U.S. President Barack Obama took the oath of office for his second term. The 57th presidential inauguration was celebrated in Washington, D.C. on January 21, 2013.  In his inaugural address, President Obama delivered calls for action on issues ranging from the federal budget to social policy.  His speech also offered a platform on environmental and energy issues.  What did the 2013 inaugural address say about environmental and energy policies?

The United States Capitol after the inauguration ceremonies on Martin Luther King Day, January 21, 2013.

Climate change featured prominently in President Obama's second inaugural address.  Drawing on the official transcript of the address provided by the White House:

We, the people, still believe that our obligations as Americans are not just to ourselves, but to all posterity. We will respond to the threat of climate change, knowing that the failure to do so would betray our children and future generations. (Applause.) Some may still deny the overwhelming judgment of science, but none can avoid the devastating impact of raging fires and crippling drought and more powerful storms.  

Exactly how he plans to address climate change remains to be seen.  Likely measures include further Environmental Protection Agency regulations covering emissions from coal plants, greater military use of renewable and alternative fuels and energy sources, and an emphasis on energy efficiency.

President Obama also advocated for greater use of sustainable energy resources:

The path towards sustainable energy sources will be long and sometimes difficult.  But America cannot resist this transition, we must lead it. We cannot cede to other nations the technology that will power new jobs and new industries, we must claim its promise. That’s how we will maintain our economic vitality and our national treasure -- our forests and waterways, our crop lands and snow-capped peaks. That is how we will preserve our planet, commanded to our care by God. That’s what will lend meaning to the creed our fathers once declared.

Because this paragraph immediately followed his remarks about the climate and natural disasters, the speech suggested greater reliance on renewable or sustainable energy as another response to climate change.  President Obama emphasized both the environmental and economic value of these alternative energy resources.

Left unsaid were the details on the path towards sustainable energy.  Will President Obama suggest a national program requiring the use of renewable electricity?  Congress enacted a renewable biofuels standard as part of the Energy Policy Act of 2005, and most states have enacted laws requiring utilities to source electricity from renewable sources.  To date, no proposed federal electric renewable portfolio standard has found traction in Congress.  What about federal tax credits and incentives for renewable energy, such as the renewable electricity production tax credit and investment tax credit?  Last year President Obama called for making the production tax credit permanent and refundable, meaning taxpayers would not need to have any income tax liability to benefit from the credit.

Based on President Obama's 2013 inaugural address, he will push for solutions with enthusiasm and vigor.  The ultimate proposals, and the paths towards their execution, may affect their chances of success.  Exactly what measures surface -- and which can either pass through Congress or, in the case of agency action, survive legal challenge -- will be revealed over the next four years. 

Energy implications of fiscal cliff deal

Congress enacted the American Taxpayer Relief Act of 2012 on January 1, 2013.  The bill's primary purpose was to stave off the so-called fiscal cliff by extending tax cuts and unemployment benefits.  The bill also included a variety of energy-related provisions, including extensions of tax credits for producers of biofuels and renewable electricity.  These policies will shape business activity in 2013.

The most prominent energy provisions in the act extend and modify incentives for producing renewable electricity.  One extended the production tax credit for wind.  The production tax credit is worth 2.2 cents per kilowatt hour of electricity produced for a 10-year period from a wind facility.  While the production tax credit had previously been available only to wind facilities placed-in-service by the end of 2012, the new legislation extends the credit to any facility that begins construction before the end of 2013 to claim the 10-year credit.  This provision is estimated to have a net of cost $12.109 billion over ten years but was seen by some as essential to continued investment in renewable energy facilities.  A parallel provision extended the investment tax credit in lieu of production tax credit, which gives a tax credit equal to 30 percent of eligible investment in renewable facilities in the year that the facility is placed-in-service. Facilities must begin construction by the end of 2013.  This provision is estimated to cost $135 million over ten years, suggesting Congress thinks the investment tax credit will be applied to about $450,000,000 in qualified investments.

Other provisions extended credits for energy-efficient improvements to existing homes, plug-in electric vehicles and alternative vehicle refueling property, producing cellulosic bifuel, biodiesel and renewable diesel.

The extension of the renewable electricity credits will stimulate growth in an industry that has suffered from uncertainty over their renewal.  Their previously-scheduled 2012 end led to a rush of construction to enable projects to qualify for the tax credits, but fewer new projects were announced in 2012 as they appeared unable to be placed in service before the deadline.  The credits' renewal will likely lead to a similar scramble to complete at least some construction financing and begin construction in 2013.  This in turn may mean busy caseloads for state environmental and energy permitting authorities, as developers pursue permits to enable construction to begin this year.  Projects able to start construction in 2013 will be eligible for either the production tax credit or the investment tax credit, even if construction takes several years.  This feature may help offshore wind and other projects with long construction times, if they can get the permits to start work this year.

US oil boom leads to pipelines, rail expansion

U.S. oil production is increasing as a result of new production techniques which allow crude oil to be recovered from oilshales.  U.S. oil production is projected to increase about 24 percent to 7.9 million barrels a day by 2014,the highest production level since 1988. Domestic crude can be delivered to refineries at prices up to 20% lessexpensive than those for imported crude. The abundant and lower-cost domestic supply drives demand forcost-effective ways to transport crude oil across the country, includingpipelines and rail service.

In general, pipelines are the cheapest way to move largequantities of crude oil from well fields to refineries.  Many existing pipelines are either fullyutilized or no longer match up with demand for transportation.  As a result, a massive amount of pipelinecapacity is under development, with 20 major projects starting in each of thenext two years.  One observer has called2013's addition of 4 million barrels a day of capacity into Houston "the biggest single oil pipeline infrastructure addition ever seen in the world."

 

At the same time, shipments of oil by rail are alsogrowing.  Like pipelines, railroads allowproducers to ship oil to coastal markets where it is generally morevaluable.  Railroads have severaladvantages over pipelines, including flexibility and the ability to connectpoints that currently lack pipeline access. In the past three months, oil producers have announced plans to invest $1 billion in rail depots and other infrastructure needed to ship crude by rail. Bloomberg reports that the American Association of Railroads projects that more than 200,000 train cars of oil will be shipped in2012, the most since World War II.

 

Both rail and pipelines have roles to play in thetransportation of crude oil in the coming years.  In many cases, rail service is available now,while expanded cost-effective pipeline transport is still under development.Each mode competes for oil transport business against the other, but the challenges of siting and building new linearinfrastructure like railroads and pipelines points to heavy reliance onexisting assets until new pipelines or rail routes can be built.  The result may be a several-year boom in railtraffic until major new routes are rationalized as pipeline paths.  If production and refinery operationsstabilize, the need for rail's flexibility may be outstripped by the value oflower-cost pipeline transport.

2012 natural gas wholesale prices fell 31%

2012's biggest revolution in the energy sector may be the commercial availability of low-cost natural gas.  Significant growth in the volume of shale gas produced by hydraulic fracturing, combined with mild demand for natural gas, resulted in 2012 average wholesale prices that were 31% below 2011 prices.

As a commodity, prices for natural gas are typically stated at a pricing point known as Henry Hub, a pipeline distribution hub in Erath, Louisiana.  In 2011, the average price at Henry Hub was $4.02 per million British thermal units (MMBtu).  In 2012, that price fell to $2.77 per MMBtu, the lowest average annual price at Henry Hub since 1999.

Overall, average annual prices for natural gas fell 30%-34% in 2012 compared to 2011 for buyers at most major trading points.  The U.S. Energy Information Administration recently released this chart showing average spot prices for natural gas in 2012, and the percent change since 2011:

The historic low pricing is driven by several factors.  Natural gas production was up 4% compared to 2011 levels, particularly from the Marcellus Shale and Eagle Ford basins.  Gas inventories in storage remained high.  At the same time, demand rose by 3%; increased use of natural gas for electric power generation was partially offset by a relatively mild winter.

What will 2013 hold for natural gas pricing?

Georgia Power to close many coal-fired plants

Following the current trend of coal-fired power plant closures, electric utility Georgia Power has announced plans to retire 15 coal- and oil-fired generating units by April 2016.

Georgia Power is a vertically-integrated investor-owned public utility serving most of Georgia.  A Southern Company subsidiary, Georgia Power currently has 18,623 MW of generating capacity.  While its portfolio includes nuclear, natural gas and hydro generation, the bulk of Georgia Power's capacity is fueled by coal, with 11,387 MW of coal-fueled generation at 10 plants across Georgia.

This week, Georgia Power announced that it will request approval from the Georgia Public Service Commission to decertify and retire 15 coal- and oil-fired generating units, with a total capacity of 2,061 MW.  The company plans to request decertification of most of the units by April 16, 2015, the effective date of the U.S. Environmental Protection Agency's (EPA) Mercury and Air Toxics (MATS) rule requiring more stringent air emissions controls for fossil fuel-fired plants.  The utility cited factors including the cost to comply with existing and future environmental regulations, recent and forecasted economic conditions, and lower natural gas prices, as contributing to the decision to close these units.

Georgia Power's announcement follows other similar utility decisions to close coal-fired power plants, including Progress Energy Carolinas and Dominion.

2013: a look ahead

With the new year upon us, here is a preview of several energy-related issues and events we will likely see this year:

Expansion of natural gas production, transmission and distribution.  The spread of hydraulic fracturing or fracking as a technique to produce natural gas from previously-uneconomic sources appears to be the largest revolution in the U.S. energy landscape in decades.  Natural gas will continue to displace coal and oil as an energy source in 2013, particularly for the generation of electricity.  The availability of cheap natural gas will also lead to the development of more local distribution company pipelines, enabling more businesses and homes to connect to natural gas supplies.  2013 will likely also bring proposed new natural gas transmission pipelines, connecting gas sources like the Marcellus and Utica shale fields to consumers across the country.
 
Offshore wind in U.S. waters.  2013 may see the construction of the first offshore wind projects in United States waters.  Cape Wind's project off Massachusetts may start cable work or other construction this year, as may Deepwater Wind's Block Island project off Rhode Island and Fishermen’s Energy's project off Atlantic City, New Jersey.  Congress's last-minute extension of the Investment Tax Credit or ITC gives a significant boost to offshore wind projects capable of beginning construction in 2013.  Not only was the tax credit's deadline extended by one year, but Congress also changed the trigger from being "placed in service" to commencing construction by December 31, 2013.  No offshore wind projects are currently operating or under construction in U.S. waters, so 2013 could be the year the first projects enter the water.  The federal Bureau of Ocean Energy Management is expected to continue its leasing program, making more ocean sites available for future offshore wind projects.

Keystone XL pipeline.  The Keystone XL pipeline, a $7 billion proposed extension of an existing crude oil pipeline, is slated to connect Alberta, Canada to Texas.  In 2011 and 2012, the project faced public scrutiny and failed to secure necessary federal and state approvals.  Among other permits, the project faces State Department review because it would enable imports or exports of oil across the national border with Canada.  Meanwhile, project lead TransCanada is moving ahead with the construction of some of the domestic legs of the project, and the full project is likely to come back up for review this year.

Energy efficiency continues to grow.  Investments in energy efficiency are likely to continue to grow in 2013.  Using fuels and energy sources more efficiently saves money for businesses and homeowners capable of making the investment.  It can also lower market prices for electricity and fuels by reducing demand, spreading the savings across all consumers.  New England regional electric grid operator ISO New England recently revised its load forecast to predict no increases in the demand for electricity through 2021 as a result of increased investment in energy efficiency.  This trend is likely to continue nationwide.


With 362 days left in the year, these issues and events are likely to be discussed for some time to come.  Will these predictions come true in 2013?