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Election brings certainty to US oil sector

The US’ top oil-producing states - Texas, Louisiana, Oklahoma, Alaska and North Dakota – remained firmly Republican in 6 November’s presidential election, yet they stand to benefit from Barack Obama’s second term

During Obama’s first term, domestic oil and gas production hit its highest levels in two decades. According to think tank Chatham House, this is unlikely to change. This growth in domestic output has reduced oil imports from 57% of total consumption in 2008 to an expected 43% this year. If this trend continues, imports will make up just 36% of US total oil consumption by 2035.

But the direction Obama’s energy policy takes will likely be hampered by the US budget deficit and looming battles to cut the country’s $16 trillion debt. Josh Freed and Ryan Fitzpatrick, from US think tank Third Way, noted in the report they wrote for Chatham House that “congressional deadlock” will be a feature of the political landscape.

In the short term, the White House faces a number of outstanding issues it must now address following a year of non-stop campaigning.

The Gulf of Mexico

Activity is returning to normal two years after the Macondo disaster, with drilling permits at their highest level since 2008. Later in November, the Bureau of Ocean Energy Management (BOEM) will offer up substantially all the remaining acreage in the western sector. Earlier sales in the central Gulf have raised billions for federal coffers.

With the lease sales in train, the Gulf is likely to see a return to record production and drilling. It comes with a caveat that there will not be exploration along the eastern seaboard in the same period. Given the administration’s insistence that existing Gulf leases hold more than 75% of America’s undiscovered oil and gas, there will be a clear preference to develop those lands first. As Obama insisted during the campaign, companies must “use them or lose them”.

Onshore upstream

The onshore drilling boom is a true success story, due to American ingenuity and entrepreneurialism, but it’s taken place mainly on private land. While production on federal lands is increasing, the amount of federal acreage under lease is barely half the amount leased during the Reagan era.

The federal government owns half of the land in states such as Utah, and emerging plays like the Uintah. Defeated Republican candidate Mitt Romney’s proposal to allow states to administer federal land was a good one; Obama will be pressed to cut red tape or do the same.

Coal/climate

Though Obama was accused of waging a war on coal, the reality is that low natural-gas prices have undermined the economics of coal-fired power generation.

Thanks to fuel switching in the power sector, US greenhouse gas (GHG) emissions are at their lowest in two decades, according to the Energy Information Administration (EIA). Even better, the government did not have to lift a finger to do it.

There will be pressure for emissions-reductions standards, and a resurrection of arguments for cap-and-trade or a carbon tax. The question is whether Obama will move to enforce binding GHG reductions, or allow market forces to do the job for him.

Alternative energy

In his first term, Obama provided more than $67bn in public funding to develop clean-energy technologies.

This led to 110% increases in solar generation and 116% for wind between 2008 and 2011, according to the Department of Energy (DOE). Nevertheless, renewables account for barely 3% of US energy supply, according to the EIA.

Already under pressure to cut the deficit, continued support for projects like Solyndra appear unlikely. Obama’s threat to re-allocate $4bn of subsidies from oil and gas companies and reinvest the funds in clean energy is barely a fraction of the amount the government is likely to cut.

Demand

While Romney put forth aggressive plans to increase supply, Obama implemented the US’ highest fuel-economy standards ever, at 54.5 miles per gallon for cars and trucks by 2025. Combined, the new rules will reduce US consumption by 2m barrels a day, and are now assured. Despite opposition from the auto industry, this is one area Obama has broad support from both voters and consumers.

Exports

A crucial decision for the US administration will be whether to allow exports of oil and/or natural gas. The Gulf is poised to become the world’s largest exporter of liquefied natural gas (LNG) if the government consents to allowing shipments to gas-hungry consumers in Asia. However, economic diversification in blue states, like Ohio and Pennsylvania, depends on plentiful supplies of cheap gas.

Obama will be pressed to restrict LNG exports to provide feedstock for secondary manufacturing and petrochemicals. At the same time, LNG exports could provide higher prices for producers and redress trade imbalances with countries like China.

Oil is trickier, given that the US will remain a net importer for decades. It’s hard to see how large-scale exports of cheap US oil would be made up with higher-cost imports.

Keystone XL

It is not accurate to think of Keystone XL as an oil-sands pipeline from Canada. It’s actually three separate projects: an Oklahoma extension to Texas; a link from Oklahoma to the Bakken; and a tie-in across the 49th Parallel.

Obama could choose to withhold approval for the final 50 km crossing the Canada-US border, thereby blocking more bitumen imports from Canada. He does not face re-election in 2016, so he needn’t be swayed by lobbyists. But there is already momentum behind the project and the prospect of plentiful oil supply from a reliable neighbour will be hard to turn down.

The bigger question is the US energy relationship with Canada, and what it looks like with a greater Chinese influence. Canada is determined to diversify markets. The US doesn’t need as much Canadian oil. China waits.

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