Oil, Tar Sands, Coal, Natural Gas & “Energy Hydras” – How the debate over Keystone XL gave breathing room to renewable energy. And how a long debate over lifting the U.S. Crude Oil Export ban will do the same.
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In January, I read an article via The Rocky Mountain Institute blog, which questioned whether; global oil majors were highly concerned about Keystone XL (KXL) as it was going before Congress for approval. The economic necessity of the third and final leg of Keystone XL, from Alberta to Cushing, Oklahoma was changing. There is little doubt, putting aside all less qualitative arguments either for or against Keystone XL, the oil majors, such as ExxonMobil (XOM), British Petroleum (BP), ConocoPhillips (COP) or Royal Dutch Shell (RDSA) interest in the project was waning. Their direct promotion and resources dedicated by the industry advocate, American Petroleum Institute (API) was rapidly decreasing.
Steve Coll’s “Private Empire: ExxonMobil and American Power” helped explain why the majors were pulling out of this battle and dedicating resources elsewhere (before the global oil slump), as he argues, in particular with ExMo, they are near geniuses in navigating turbulent political and economic waters. Keystone XL was a lost cause, things must have been happening elsewhere of more importance.
The battle from both sides, between the oil/tar sands majors in Alberta, and their “domestic security” advocates in the United States, versus the environmental proponents supported by State and Local rights defenders, was dragging on. A Congressional resolution and threats of a Presidential Veto by Barack Obama were no foregone conclusions from either camp.
And things most certainly were happening elsewhere, regardless that all non-industry eyes were focused on Keystone XL.
Having been in the oil patches throughout the U.S., provided ancillary services at refineries throughout the Gulf Coast, and consulted at energy projects throughout the world, I penned a short piece, “Keystone XL, a positive statement to changing global energy dynamics?“, to describe what I was seeing prior to the 2014 Global Oil Bust across all energy sectors. Being a “nobody”, except for a very astute observer of global energy concerns, it went nowhere.
Then I saw an article with an image of 2014’s Major Global Crude Oil Trading routes and quantities, with the missing “arrow” of Keystone XL, and it was clear what I struggled to write in words.
A dead fish floating on the top of the water doesn’t stop the fish from swimming below.
All throughout the long protracted Keystone XL debate, U.S. pipeline infrastructure ownership was consolidating, and the utilization of long established pipeline routes was changing. What the Amory B. Lovins’ “What If Congress Threw A Keystone XL Party And No One Came?” article missed was a reality U.S. crude logistics were rapidly changing, marked notably by the Westward Ho pipeline. Shell couldn’t find buyers to reserve pipeline capacity after repeated open bidding. It was needed desperately a few years prior, but it’s purpose evaporated practically overnight.
Kinder Morgan was consolidating regional pipeline systems, primarily natural gas, such as Colorado Interstate Gas (CIG), under a single corporate structure. Enbridge, a Canadian operation, already had significant assets at the U.S. Strategic Petroleum Reserve and the largest pipeline hub in the country at Cushing. They also owned the only major “direct” line coming out of Canada, via the Great Lakes, through the Ohio and Mississippi valleys into Houston.
Even though, The Shale Gas and Oil Boom was happening from the Bakkans in North Dakota, all the way south to The Eagle Ford in South Texas, new pipelines were being constructed at a blistering rate across the United States. From North Dakota to Colorado, they headed towards Cushing. While terminals on The Gulf Coast between Corpus Christy and Galveston were receiving crude from Texas and New Mexico.
Suncor, a heavy synthetic crude configured refinery in Denver, only received a pipeline from Weld County [Colorado] exploration and production (E&P) operations in 2014, even though two pipelines were recent new builds, and a third was under construction, again to Cushing.
Floating Roof Tank (FRT) farms were popping up like mushrooms to handle the rapidly growing U.S. light crude production, from North Dakota, to supply rail car logistics fanning out across the country, to Weld County, Colorado and my home, to the Eagle Ford in Texas. I know, because I was providing accessory, non O&G support at all of them with my previous employer. The ones I did not work at directly, I passed in route to my clients who were also building pipelines and FRTs.
The difference between Keystone XL and all other pipeline and rail operations in the U.S. was simple really, and everything to do with the type of crude being transported.
The distinction was, Is The Crude … Light or Heavy?
Sweat or sour, less so a factor in hydrocarbon logistics, as it describes the sulfur concentration, where sour has a higher sulfur content. Sour crude blends are more corrosive than sweet and the odorless vapor, Hydrogen Sulfide (H2S) gas is fatal to humans. Every O&G worker knows this instinctively, each required to carry a personal gas monitor. And due to H2S’s highly flammable properties, any H2S alarms tripped result in immediate stoppage of all ancillary operations until the source can be isolated, contained and evacuated.
Sweet-sour classifications of hydrocarbons aside, Texas and Gulf Coast refineries are primarily configured for heavy crude. Tar sands, once processed into synthetic blends for transport to refineries, through applications of heat, hence the need for natural gas “boilers”, and then dilution with natural gas liquids (NGLs) to increase viscosity, are heavy.
Houston, we have a problem. And a solution.
The main source of heavy crude for the Gulf Coast refineries is Venezuela. Political or ideological considerations aside, Baytown, Houston, Port Arthur and Westlake refineries were built for Venezuelan heavy. A review of the “Major Oil Trading Map” is in order, as is remembering the fate of the Westward Ho pipeline.
Converting to light blends coming out of the U.S., would be enormously expensive to the refinery operations. Regardless the common misrepresentation issued that “the U.S. has built no new refineries since…[whenever]”, capacity and capital improvements were increasing at a rate leaving the Gulf Coast at a deficit of 15-25,000 skilled welders, causing project delays and added costs.
Substituting Venezuelan heavy for Alberta’s heavy synthetic provided a “domestic security” angle to bolster the Keystone XL project as well. Even though not quantitatively necessary, its qualitative effect was beneficial for its advocates in the endemic political and foreign policy battles waging within the United States.
Alberta, with their stranded assets, unable to reach global markets for their natural resources, regardless the externalized carbon dioxide emissions cost or energy intensity to process tar sands into synthetic crude, was equally on-board with Keystone XL. The Canadian Midstream company, Enbridge, was also supportive for the building of Keystone XL, to link Alberta with The Gulf Coast. But outside the initial building, and synthetic crude “wheeling” revenues they would gain from the third and final northern leg, they also wielded a Straight Flush with an Ace high in the U.S. crude and natural gas logistics card game. Substantial control of U.S. pipeline and storage assets; at the critical trading hub in Cushing, Oklahoma, as well as, in the American “bread basket” of crude and natural gas Midstream networks.
Alberta’s tar sands were reaching The Gulf Coast, with or without Keystone XL, in a “virtual” pipeline. This “virtual pipeline” reversed traditional light crude flows to Midwest refineries, as well as re-purposing natural gas pipelines into the North East. The need for dramatic increases in rail car traffic to transport crude oil in the U.S., and the hazards and tragedies that resulted was a direct result of increased domestic light crude production, few pipelines to transport it and prioritization of existing pipelines to meet the heavy syn-crude deliveries to The Gulf.
U.S. Hydraulic Fracturing & Horizontal Drilling Booms aside, NGLs are the untold story
Crude and NG E&P have glutted the U.S. NG market for the past 5 years or more, both in associated NG capture or direct NG production, increasing downward pressure on domestic prices.
The economics of cheap NG should have forced decreases in the Upstream E&P drilling sectors for natural gas, thus increasing domestic market prices, in a simple supply versus demand dynamic. Even with demand growth at the local distribution companies (LDCs) serving small customers and home owners being tepid, a substantial rise in consumption from a rapidly expanding U.S. NG electric generation “Peaker” fleet and increased petrochemical utilization of cheap NG for plastics precursors to feed global markets, could not counter other factors at play.
What is often overlooked is the third sub-sector of the U.S. shale gas and oil boom, natural gas liquids. Whether associated gas at crude oil wellheads was captured or flared (in significant quantities), and horizontal drilling and hydraulic fracturing technologies were able to out-pace pipeline permitting and build operations by several orders of magnitude, natural gas entering the Upstream collection and Midstream network continued to increase due to the race for NGLs and associated reductions in direct NG E&P operations.
So, although pipelines were and are being built, unlike Keystone XL itself, an entire mechanism was/is in operation across the U.S. The Keystone XL pipeline, built or unbuilt, doesn’t matter really. However, KXL was a giant monkey wrench thrown into the gears of an enormously complex system. That system, shy a concerted U.S. Energy Policy, is arguably “managed” by a multi-headed “Energy Hydra”, each head, of this mythical beast, taking care of its own needs, locked to the other heads without choice, but cannot exert complete autonomy of movements and direction on their own either.
I cannot honestly say, a domestic energy policy for the United States could manage the disparate energy sectors and interconnected systems any better. Whether for “domestic security” concerns or towards a lower carbon future, the ideological debate does not interest me.
The U.S. Electric Market is as equally convoluted as the energy system constructed around crude oil filling our transportation needs. Regulated and Unregulated markets; vertically integrated generation, transmission and distribution “utilities”, i.e., Pacific Gas & Electric or Duke Energy; horizontally integrated generation, such as coal, nuclear or both, i.e., Tennessee Valley Authority (TVA). It doesn’t stop there, when you add to the mixture, a combination of all, such as NextEra Energy, (formerly Florida Power & Light) operating in Florida vertically integrated as a “utility”, but horizontally integrated as a Wind Farm and NG operator in Texas and Oklahoma, and in final merger negotiations with Hawaiian Electric Company (HECO).
The link, of course, is natural gas.
However, here we have two “Energy Hydras” side by side, where natural gas has a head on each. If the NG command and control center exerts enough influence to bring two “Energy Hydras” within striking distance of the other, the semi-autonomous energy sector heads will take swipes at the heads and support mechanisms of the other “Energy Hydra.” How the non-natural gas heads of each “Energy Hydra play with each other is up for debate as well.
Each encounter varies; gains and losses for each are generally a wash to the “Energy Hydra” itself. However, any Natural Gas head does by all counts benefit from the in and out fighting of all the others, particularly in the U.S. markets, but not exclusive from global markets either.
What does the future hold?
Does a day come, where the two, or more, natural gas hydra heads, effectively controlling the fate of each vast mechanism, recognize their strength together, and pair up? The other sector heads of the “Energy Hydra”, whichever are left and in whatever condition they wield some self-autonomy, become subservient to the whims of this new natural gas command and control pairing. Coal is currently on a downward spiral, nuclear may follow in the future; where the NG SCGT fleet was built as peak and seasonal support to the two base load giants, from within horizontally and vertically integrated “utilities” uniformly. Natural gas was not to be cheap, used as a last resort, but then it went low and stayed low. The nuclear and coal heads of the “Energy Hydra” have effectively sealed their own fates when the unforeseen conditions changed.
It is hard to see it any other way.
U.S. natural gas supply has weathered all storms on the Upstream production side, as well as Downstream consumption, small and large. Exporting as liquefied natural gas (LNG) to the global markets will put downward pressures on global markets, but likely will not improve low market conditions in the U.S. other than high, weather related, spot prices. But these temporary occurrences are more due to pipeline infrastructure constrained markets in the Northeast U.S. and California, the crude oil and electricity market “Energy Hydras” grabbing a bite of the other when conditions allow.
When the rhetorical discussions of either Keystone XL or lifting the U.S. [Crude] Export Ban enters the fray in the Main Stream Media or energy sector discussion groups, it’s difficult not to chuckle to myself, recognizing them as small fry concerns in a dynamically evolving energy paradigm. Either and both are not critical or controlling gears in the U.S. domestic energy framework, and that marginalization only increases in a global energy perspective.
The food source of “Energy Hydras” is changing.
The article I wrote in January was this long growing recognition of “Energy Hydras” at play. Regardless of whether Keystone XL was built, Alberta’s tar sands reached Houston unencumbered by a “virtual network”, or the U.S. Crude Oil Export Ban was lifted.
And as I have continued to argue here, and elsewhere, all this activity of the respective U.S. “Energy Hydras” has continued unabated, but not mutually exclusive, from the overall global crude oil bust in 4th Quarter 2014 or increasingly soft global coal markets.
“Energy Hydras” are at work around the world.
Whether the effective controlling head of each is a national government or parastal, a free market global oil or coal major, energy sector trade advocates, a vertically integrated electric “utility” (regulated or not), climate change “denialists” or proponents, none of them are important in and unto themselves.
One thing that is a given however, is that their traditional food source, to power their respective battles, is changing. Be it crude oil, coal, nuclear, natural gas, wind or the sun itself, how each adapts or dies as a result of this changing of economic sustenance, is what excites me.
Some will live, some will die, and others will evolve.
And some of these “Energy Hydras” gave already evolved, and those are the ones I am watching!