This is what happens when you turn the private sector loose to innovate, develop new technologies and improve efficiency

Some interesting testimony came out of last week’s House of Representatives Energy & Commerce Committee hearing. The intention of the committee hearing was to update Congress on “The Shifting Geopolitics of Oil and Gas,” as the hearing title made clear.

This committee oversees multiple cabinet-level departments and agencies, including the Department of Energy, the Federal Trade Commission, FCC, the Department of Transportation, and the EPA, among others.

The hearing was held to examine how U.S. energy development—the shale boom—has affected jobs, the cost of energy, the U.S. economy and the U.S.’s position in global geopolitics.

How Important is the American Shale Renaissance to the World?

How Important is the American Shale Renaissance to the World? Congress wanted to know and was told at a House Energy and Commerce Committee hearing entitled “The Shifting Geopolitics of Oil and Gas.”

The experts who testified at the hearing included some familiar energy names—Sempra Energy (ticker: SRE) Chief Strategy Officer Dennis Arriola; Continental Resources (ticker: CLR) Chairman and CEO Harold Hamm; Dr. Kevin Kennedy, deputy director, U.S. Climate Initiative of the World Resources Institute; and IHS Markit (ticker: INFO) Vice Chairman Dr. Daniel Yergin.

In his prepared remarks, House Energy & Commerce Subcommittee on Energy Chairman Fred Upton set the stage for the USA’s energy metamorphosis:

“In 2005, American domestic oil and gas production was declining and the country reached a point of peak reliance on foreign sources of energy. At that time, we were importing eight times more energy than we were exporting and we were becoming increasingly dependent on OPEC nations for our energy needs.”

Energy & Commerce Committee Chair Greg Walden (R-Oregon) summed up what has happened to U.S. energy since 2005 that delivered an unprecedented energy transformation to the United States:

“The shale revolution, now ten years in the making, has … created hundreds of thousands of jobs and billions of dollars in investments that wouldn’t have happened were it not for our energy abundance. The jobs and investments are widespread throughout all sectors of the economy and across all 50 states.

“It’s also had a big impact on our power sector, and with the shift to abundant and cheap natural gas, we’ve seen a huge reduction in our carbon emissions. In fact, the U.S. is leading the world in reducing carbon emissions by a large margin. Since peaking in 2005, our carbon emissions have declined steadily and this trend looks likely to continue.

“This just goes to show that we don’t need government mandates to reduce emissions. We can get much better results when we allow the private sector to innovate, develop new technologies, and improve efficiency,” Walden said.

Testimony from four energy experts

The American energy renaissance is the single-most defining aspect on this planet: Harold Hamm

In his prepared remarks to the committee, Continental CEO Harold Hamm said: “I testified to the House Agriculture Committee on July 8, 2015 about The American Energy Renaissance. I said it then and will say it again – The American Energy Renaissance is the single-most defining aspect on this planet today that will shape the next 50 years.”

“In the past 10 years, the United States has undergone an unprecedented transformation. Thanks to the ingenuity of America’s independent oil and natural gas producers, we are transitioning from a consuming short-supply nation to an energy-long supplier, dominating the world oil market.

“Thanks to the ingenuity of America’s independent oil and natural gas producers, … our country has rapidly gone from fears of energy scarcity to understanding that U.S. energy independence is within our reach.”

Hamm referenced the regulation rollback that has been underway. “Many regulations were implemented with an oil and gas scarcity mentality and have since become inapplicable and obsolete.”

“In addition, the archaic SEC 5-year rule on booking reserves vastly understates oil and gas reserves in America and doesn’t allow companies, or the country, to accurately state its true reserves. The U.S. has enough technically recoverable reserves to continue producing 10 million barrels of oil a day for more than 75 years, and this figure is likely to be revised higher,” Hamm told the House Subcommittee.

“The unprecedented gains in our economy and the miracle of American oil and gas is shifting the geopolitical balance of power back to the United States of America,” Hamm said.

During the questioning by committee members, Hamm was asked by Congressman Fred Upton: “If the oil price stays about the same—where it is today [June 2018]—is that going to continue … the exploration and  drilling and production of domestic resources, versus going too low and maybe shutting those off?”

Hamm responded by referencing natural gas and oil supply estimates in the U.S., saying “…with natural gas I think we’ve got a hundred-year supply or more. I think we can produce 10 million barrels a day of crude oil for the next 75 years. It [the advent of producing oil and gas from shale] gives us an entirely new reservoir to explore,” Hamm said.

“Basically, what we’ve done in the past is explore what leaked off of these giant shale fields where the oil was generated. And … maybe 15% leaked off into upper reservoir traps—we could go after that [in the past].  Today we can go into those resource beds like the Woodford and the Bakken and produce the oil [that’s] left down there.

“So there’s about 85% available—what can we get of that, 20%, 25%, 30%?–sure,” Hamm said.

U.S. needs to engage in more intense climate action and Congress should pass a carbon tax to support it: Kevin Kennedy

Dr. Kevin Kennedy, deputy director of the U.S. Climate Initiative of the World Resources Institute began his testimony by saying: “The energy landscape in the United States today includes more than developments in the oil and gas industry.”

Dr. Kennedy was true to his word. His 10 pages of prepared testimony mentions the word oil only two times. With the strong proponents of oil, natural gas and LNG flanking him at the witness table, it felt like Kennedy had stepped into the wrong hearing.

Speaking exclusively to the issue of climate change, Dr. Kennedy championed a “clean energy transformation” which was calling for the U.S. to accelerate its uptake of renewable energy, including making vast increases in electric vehicles, “stepping up on clean energy and climate action,” and providing economic support of the transition to renewable energy with a national carbon tax.

“While states, cites and businesses are stepping up on clean energy, Congress and the administration could and should be providing meaningful support for these efforts through increased clean energy research and development, incentives for deployment of clean energy technologies, investment in infrastructure for clean energy deployment and support for a carbon tax. Doing so would help companies and local communities across the country take advantage of the economic development opportunities that a clean energy transformation offers,” he said.

The window for the U.S. to become the world’s LNG leader is closing and it may be closed for decades: Dennis Arriola

“As a result of two key developments — the U.S. shale energy boom and the growth in U.S. LNG export opportunities — the outlook for domestic and international natural gas markets has never been better,” Sempra Energy Chief Strategy Officer Dennis Arriola told the committee.

“If we invest wisely and follow smart, pro-market policies, there is little doubt that the U.S. economy will be the big beneficiary with job growth and even greater energy independence.

“Advances in technology for extracting gas have resulted in an abundance of affordable energy here in the U.S. The Potential Gas Committee (PGC) recently released its latest biennial assessment of the nation’s natural gas resources, which indicated that the U.S. possesses a total technically recoverable resource base of 2,817 trillion cubic feet (TCF) as of year-end 2016, or supplies that will last more than 90 years at current extraction levels.

“This is the highest resource evaluation in PGC’s 52-year history, exceeding the previous high assessment (from 2014) by 302 TCF (increase of 12%),” Arriola said.

“As a result of this transformative accomplishment, natural gas now serves as the leading fuel source for the industrial, commercial, and residential sectors of the U.S. economy.

“This increased consumption is providing for significant job growth, bringing back industries to the Gulf Coast that are dependent on reliable and affordable energy, boosting our local and national economies, and lowering air emissions.

“It is being used increasingly for power generation and assisting in the integration of renewable energy into the electric system, ensuring reliability and resiliency when the sun isn’t shining or the wind isn’t blowing.

“When used as a transportation fuel, natural gas reduces fuel costs and helps clean the air,” he said.

“While an abundance of U.S. natural gas is leading to a manufacturing resurgence in the U.S., it also has the potential to strengthen alliances with developed and developing countries by providing a stable, affordable, flexible, and reliable source of energy that gives those countries the certainty they need to build their energy infrastructure.

“U.S. natural gas exports also can help our European allies reduce their energy dependence on Russia. Finally, U.S. LNG exports can help countries improve air quality and the environment by displacing less clean resources.”

Arriola lobbied for removal of the White House’s recently imposed steel and aluminum tariffs, which he said “reduce the competitiveness of the energy sector in general and the LNG pipeline business in particular.”

Arriola warned that permitting and regulatory timing to achieve LNG export plants and pipelines to bring the gas to them are growing longer rather than shorter.

“You can be sure that other major LNG exporting countries, such as Russia, Australia, Qatar and Mozambique, are doing everything possible to enhance their competitive position. If these and other nations provide better certainty of regulatory process than the U.S. does and enable their native companies to get to the market sooner, then they will dominate the market, and the U.S. will lose out.

“Moreover, the lack of certainty with respect to timing undermines the ability of developers to develop and finance these types of projects.

“Once our foreign competitors enter into long-term LNG contracts with customers, the window of opportunity for U.S. based projects closes for decades. And that means we would lose out on the economic and foreign policy benefits to other countries like Russia. We can’t let this happen.”

“We need to ensure that FERC at least keeps to its typical permit review schedule of no more than 18 to 24 months, and that it looks for opportunities to streamline the process even further,” Arriola said.

Rep. Barton asked Dennis Arriola what was the 10-year outlook for LNG prices on the world market. “I would assume they are going to come down as we ramp up out exports?” he asked.

Arriola: “What we’re finding is that as demand externally continues to increase, there’s more production domestically and it’s helping to keep the prices flat, it’s continuing to push them down. What we’re seeing is that the reason countries on the outside are looking to buy U.S. natural gas is because of those prices.”

Committee Vice Chair Texas Congressman Pete Olson asked Dennis Arriola to talk about the idea that getting U.S. LNG to market is time sensitive. “Why does it matter how fast you ramp this production up, and what markets are in jeopardy if we delay or drag this out?”

Dennis Arriola: “When foreign countries decide to enter into contracts for LNG they’re ordinarily in the 20-to 30-year time frame. And so as I’m buying a product or service for 20 or 30 years, I don’t need to come back every year and re-up. And so as U.S. companies including Sempra look at building a project—whether it’s in Cameron or Port Arthur—we’re really focused on trying to get all those contracts together up front so that we can get them financed and to build the projects.

“If we can’t get those projects this year or next year because somebody else has already signed up these 20-30-year contracts, we’re out of the market. And the construction jobs that we talked about and the impact to the local economy goes away, or never develops.”

The shale revolution stimulated the entire U.S. economy by delivering a long supply chain of low-cost energy: Dr. Daniel Yergin

IHS Markit Vice Chairman Daniel Yergin delivered his view of where U.S. oil and natural gas are today. Yergin brought the discussion back to the root cause of America’s growing energy dominance: “As for oil, political leaders had for four decades invoked “energy independence” as a national goal, meaning reducing oil imports. But that did not match the reality. The question only seemed to be how much higher would oil imports go as a share of total oil consumption. But, in a decade, we have gone from importing 60% of our oil down to just 16 %, on a net basis.

“The shale revolution has been a major stimulus to the U.S. economy – not just in the oil and gas sector but across the entire economy because of the long supply chains. Industries that were expected to flee the United States because of high-cost energy are now spending tens of billions to build new plants in the United States because of the availability and moderate cost of energy.

“This revolution is having major geopolitical impacts that are constructive for the United States. It has introduced new positive dimensions in U.S. relations with many countries and provided the United States with new kind of influence.

“The development of the technology took decades and in some ways began with professional studies in the early 1980s. It was not until the period 1998-2003 that combining two technologies – horizontal drilling and hydraulic fracturing – enabled unlocking on an economic basis of resources heretofore thought permanently trapped in geological formations.

“In the mid-2000s, literally dozens of projects were being developed to import liquefied natural gas (LNG) on the premise that the United States was entering an era of permanent shortage of gas.

“At the same time, there was great fear that the United States was dangerously vulnerable because of ever-higher oil imports. But the signs that this revolution in production might have wider impact emerged in 2008 when it was noticed that U.S. natural gas production was going up, not down. A few years later, it became clear that U.S. oil production was increasing, not declining – the result of the application of these same technologies.

Yergin said that his firm predicts that in the next five years, “the current 3.1 Bcf/d of LNG export capacity will grow by another 6.9 Bcf/day.

“Investment in these plants will total an estimated $56 billion. Instead of being a gas-short LNG importer, the United States is now on track to rank among the world’s major LNG exporters. By 2025, the global LNG market is anticipated to be more than 400 million metric tons per year, with the top suppliers—Qatar, Australia, and the United States— exporting 60% of total supply.

“IHS Markit projects that [Permian oil production] will more than double, reaching 5.4 million barrels per day by 2023 – meaning that this one region in the United States will be producing more oil than every country in OPEC, except for Saudi Arabia.

“The only place in the world where E&P investment is significantly rising is in the United States. Such expenditures are stagnant in the rest of the world.

“Without the shale revolution, the United States would be importing large volumes of oil and gas, our trade balance would be dramatically different, millions of jobs would not exist, and the United States would be less competitive.

“In short, the ‘Shale Gale’ has put a powerful new wind at America’s back,” Yergin said.

Later in the testimony, Texas Congressman Joe Barton asked Daniel Yergin: “Is there any other country in the world that has a higher delta—a higher potential production increase—than the United States? I hope the answer is ‘no’.”

Yergin replied: “The answer is ‘no’. I don’t think anywhere in the world has actually seen the kind of growth that we’ve seen in the United States in the last five or six years; it just doesn’t happen anywhere else. It’s breathtaking.”

Other witness testimony – Q&A

During the Q&A, Representative Barton referenced Congress’s repeal of the crude oil export ban and of the committee’s work “to expedite the permitting of LNG export terminals in a more timely fashion. What’s the geopolitical significance of those two congressional actions?”

Daniel Yergin: “I think the geopolitical position is to strengthen the United States, to strengthen our position in the world. It gives us a whole new vocabulary to talk to countries about, and a whole new category of respect and a deeper relationship. There’s a lot of contention in the relationship with China right now—this has taken one issue of contention off the table. If you go back eight or ten years, there still had to be this zero-sum game between China and the United States for energy. That’s completely gone, and I think that’s something that improves our position.”

Dennis Arriola: “We talk to customers outside the United States. They are looking for options, they’re looking for options away from Russia and other countries, and they want the United States to be one of those options.”

Near the end of the almost three hours of testimony, South Carolina Congressman Jeff Duncan began commenting on the movement of U.S. natural gas to Europe via LNG export cargoes as more export facilities come on line in the U.S.

Russia is ‘a gas station masquerading as a country’: Rep. Duncan

Rep. Duncan referred to Russia as “a gas station masquerading as a country.”

“Even in second-world and first-world Europe, they have problems with intermittency and power supplies.” … Europe is relying on Russia for its energy, Duncan pointed out. He said Russia uses its natural gas supply spigot to affect policy in both Eastern and Western Europe.

As a result, “Western Europe is looking west, toward the United States, a stable energy producer, an ally and a friend, to provide LNG so they can meet their energy needs and lessen their dependence—not on the Middle East for their energy—but to lessen their dependence on Russia,” Duncan said.

Rep. Olson asked Daniel Yergin: “How can we use this energy renaissance to make the world better?”

Daniel Yergin: “First of all, by helping to reduce conflict. Secondly, I think what’s happened here in the United States is a big contribution to energy security for the whole world and we benefit from that.”

Yergin said that in India and other countries who have been receiving LNG from the United States, it creates a deeper relationship with the U.S. and “it connects them more to us,” which is “beneficial to the overall political situation in the world.”

Olson described an LNG tanker he had seen arriving at the dock in Lithuania. Olson said a crowd of 500 people had come to the dock to greet the ship and were applauding its arrival. Yergin responded, saying “what’s happened with LNG to Europe, not only from us but from others, it’s really depoliticized [natural gas]—it turns Europe more into a gas market; it takes out the political implications for it. So I think it’s something that is very welcome in those countries—that they know that we’re there and we’re their friend.”

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