The state of energy in Ag’s future looks good but could come to a screeching halt with over-regulation.
By Julie Murphree, Arizona Farm Bureau
Chief Economist for American Petroleum Institute (API), John Felmy, Ph.D., recently made a trip to Arizona for a conference and sat down with Arizona Agriculture to discuss the emerging energy boom in America and the benefits to agriculture, specifically Arizona agriculture. With over 25 years experience in energy, economic and environmental analysis, Felmy is responsible for overseeing economic, statistical and policy analysis for the Institute.
According to the International Institute for Strategic Studies (IISS), the United States has dramatically reduced its dependence on oil imports over the last seven years. From their peak in 2006, imports have fallen 40% as a result of declining demand and strong growth in domestic production of liquid fuels, leading analysts to predict that the U.S. can reach oil self-sufficiency within the next 15 to 20 years.
Most oil and gas analysts will tell you that the rapid decline in crude oil imports was unexpected. With the “oil intensity of GDP” metric going down for decades and dramatically since 2006, natural gas displaced oil in industrial uses and power generation; plus energy demand fell in oil-intensive sectors such as transport, creating the two main reasons for this change.
With a downturn since 2008, we can understand reduced energy demand in consumer and industrial uses, but what about the growth in production stateside? Again, according to IISS, rising production of liquid fuels in the U.S. accounts for 60% of the fall in U.S. oil imports since 2006 and nearly 100% since 2010. The fastest growing has been the output of American crude oil, especially in the past two years. Crude oil supply has grown dramatically with what is known as “tight oil,” the crude oil found in shale deposits. Meanwhile, biofuels and liquids produced in natural gas fields, known as natural gas liquids (NGL’s) has also grown.
But, nothing speaks to the exciting times in oil and gas in America like hydraulic fracturing, or “fracking.” This technology is responsible for the shale gas revolution; applied to liquid-rich geological formations it allows for the production of tight oil. The injection of water and additives at very high pressure fractures rocks and increases their permeability to the point that hydrocarbons can flow. Combined with horizontal drilling, hydraulic fracturing has opened up a vast new resource base. This rapid development is facilitated in the U.S. by the open and competitive nature of the oil industry, the availability of financing, and a favorable legal system in which mineral rights are owned by the surface owner, not the government.
This surface ownership becomes one of the most obvious advantages for farmers and ranchers owning land above rich mineral deposits such as oil and natural gas and a profitable lease agreement with the oil and gas companies. Production is taking place mainly in Texas and North Dakota, with various states in the Rocky Mountains making a small but growing contribution. Even in Arizona, we’re producing oil (more on that later).
Not to be overlooked, all this new development means jobs. A recent study by API suggests if these opportunities really open up, the industry could add 1.4 million new jobs by 2030.
It’s in this setting that Arizona Agriculture uncovers a gusher of potential in America’s energy reserves. Following are excerpts from our interview with API’s John Felmy:
Arizona Agriculture: Ag runs on energy, just like the rest of the world. What's next for this industry and our energy resources?
Felmy: It really depends on what decisions we make as a country. We have an opportunity right now to basically do something that we only dreamed of in the last several decades and that’s develop enough oil and gas and other supplies to make us energy self-sufficient. With the new technology that we’ve seen in three broad areas in the oil and gas industry we’ve now been able to develop resources that were previously uneconomic.
First, deep water drilling is one area of technology advancement. An example would be the Gulf of Mexico. We can now drill in two miles of water and find billions of barrels of oil that we didn’t know existed before.
The second [technology advancement] is the Canadian oil sands that create a vast resource of oil previously not available under old technologies.
And the third technology advancement is the combination of hydraulic fracturing and horizontal drilling. This opens up, first, natural gas resources in areas like Pennsylvania where I’m from; but also oil resources in areas like North Dakota and south Texas.
With this combination of technology improvements and potential supply increases in the United States and Canada, plus use our bio-fuel resources, which of course is an important aspect of agriculture; we can become energy self-sufficient.
But we have to have the will to do it; we have to make decisions to open areas that are currently off limits. Then, we’ll also see a real positive impact in terms of jobs, revenue for the government and energy security.
Arizona Agriculture: How quickly could we see energy self sufficiency?
Felmy: Clearly we have to make some decisions on infrastructure, like for example the Keystone XL Pipeline, a key component for bringing oil to the United States from Canada; we have to have proper regulations including protections that government doesn’t intervene for no good reason; and we’ve got to basically open these areas. But if you have that type of framework we could do this in a dozen years according to some of the analysis we’ve seen and studied.
This is not just API saying this; we’re seeing real positive outlooks from the U.S. Department of Energy, from the International Energy Agency, from CitiGroup and others. So virtually everyone is looking at this and saying, “Yes, we can develop these resources.”
Arizona Agriculture: Obviously, with greater supply energy costs for agriculture and other industries should go down; but what else does the current opportunity foretell?
Felmy: This presents a couple of great opportunities for agriculture. The first, as you mentioned, is that energy is a critical component of agriculture production, and any time you can at least level off price increases with available supply then it’s better for an industry. Secondly, since fertilizer is a key ingredient to robust agriculture productivity and natural gas is important to fertilizer production, gains in this area are potentially significant. We have been on the cusp of basically losing our fertilizer industry like our petrochemicals for the past 10 years.
All of this is exciting from a global perspective. We often hear people arguing against the technology of hydraulic fracturing that somehow developing these natural gas resources is morally wrong. Nothing could be further from the truth because if there is anything that could help world hunger it’s developing these resources both in the U.S. and around the globe and what the potential fertilizer impacts could be for the food supply.
Arizona Agriculture: Imagining everything we’ve talked about is in place, how do you compare North America’s oil and gas reserves to the Middle East? Does it put us on a more level playing field?
Felmy: Of course it does. If you look at just how much North Dakota has increased their oil production, for example, this state alone would be as large as some of the OPEC producers. When you add in some of the other potential producing areas it’s very significant. We have over 100 billion barrels of conventional oil that we think we can develop and there’s billions more, if not trillions more, of unconventional oil that can be developed. So it really puts us back in the game in terms of producing a huge amount of oil and gas.
We’ve known this for a very long time. The problem is the current political spin [against new energy development] that is just silly. For example, the worn excuse that we have only 2% of the world’s reserve so we can’t drill our way out of it. It’s a statement that’s technically correct but completely irrelevant because we’re not talking about oil we’ve found already, which is reserves, we’re talking about resources that we haven’t developed. Those undeveloped resources are vast.
Today, we have the technology to develop [those energy resources].
Arizona Agriculture: As it relates to fracking, leases on private agriculture lands can certainly become a source of revenue for the family on that farm. Arizona won't benefit to the level of other states regarding the discoveries. What's in it for us?
Felmy: That’s correct. You only have a handful of producing oil wells in Arizona, something like 18 [21 producing wells in 2012, according to Arizona Geological Survey], and only six gas wells [4 in 2012]. You do have a small amount of production, something like 50,000 barrels of oil [51,949 barrels in 2012] a year in Arizona. There may be a prospect for more. The exciting thing about all these new technology developments is that suddenly we’ve found resources we never knew we had before; and certainly never dreamed of. [Most of Arizona’s oil production is occurring in northern Arizona.]
For example, I was just in North Carolina. North Carolina has some history of producing coal and some oil and gas but certainly not much. But now with this new technology their state is estimating there could be almost two trillion cubic feet of natural gas to be developed. So, perhaps as we go forward, some of the structures that we’ve passed over because they were not considered prime producing areas may become the next prime resource. But, the big story, of course, is the overall impact on gas prices, which affects electricity since we produce about 30% of our electricity from natural gas. So you could see those benefits. The overall economic multipliers can influence Arizona. An IHS study said that even a non- or low-producing state, like Arizona, could see 12,000 more jobs from producing these unconventional resources.
The impacts really reach very far.
Arizona Agriculture: What kind of game changer is this based on what you’re telling us?
Felmy: The price of gasoline and diesel track the price of crude oil. So the question is will adding more supply affect the price of crude? Of course, there is a lot that goes into considering this issue and I’m not in the business of forecasting but it’s clear that all things being equal as an economist that if you add more supply this helps all consumers of gas and oil. Even if it doesn’t affect price the key thing is that we’re paying ourselves.
Last year, we imported $400 billion worth of oil. This has a big negative impact on the economy because we’re shipping dollars overseas. So if we spend that money here the positive impacts could be significant irrespective of the price issue.
If you look at refined products we have a positive story. Products such as gasoline, diesel, heating oil we actually export more than we import and that’s because we produce more of these refined products than we use. On the crude side, we import more than we export.
For every billion dollars you improve the trade deficit it generates something like 5,000 to 6,000 jobs because you’re spending the money in the U.S. If it’s a billion dollars in agriculture or a billion dollars in oil, it creates the same positive impact on our nation’s economy.
Arizona Agriculture: Explain how in the next five years growth will be attributable to upstream technological advances. What does this mean?
Felmy: Oil and gas production is upstream. Downstream is basically refining, marketing and distribution. Midstream is basically transportation, pipelines and such. So when we talk upstream advances, we’re basically talking about the technological improvements in oil and gas production.
The devil’s in the details in how great our opportunities will ultimately be. Policy discussions are going on about how the federal government is ultimately going to regulate hydraulic fracturing, will they open up federal lands for more production, and those are key questions that need to be answered before we can state with absolute certainty that we have an oil boom on our hands. According to current policy, yes, we’ll see tremendous growth in the next several years. Of course that can change. We’re appealing directly to the government to do the right thing.
Arizona Agriculture: Can we truly become energy independent in five to seven years despite governmental roadblocks including regulations?
Felmy: We can certainly get a long ways toward it. Certainly within a dozen years. A variety of groups support these development advances including unions. We’ve worked closely with the building trades and unions that are in the business of developing pipeline capacity.
The challenge mainly comes from the environmental community which is strongly opposed to developing fossil fuels. You might have seen recent demonstrations in Washington D.C. that are fundamentally just silly. The notion that somehow they’re going to stop the Keystone XL pipeline and that will stop development of the Canadian oil sands is just simply silly. The oil sands are worth 10 times what the Canadian GDP is at. So the notion that Canada is not going to develop the oil sands is just absurd. If you really are an environmentalist you’ll support developing and sending the oil to the U.S. because it will reduce emissions for shipping, processing and use.
Arizona Agriculture: In an environment of energy independence - energy nirvana - what does this mean for agriculture?
Felmy: For agriculture - like all industries - it means a stable source of secure supplies. More supplies with all things being equal generally helps the market price. It also means more revenue that can certainly affect agriculture in a number of ways. Finally, government taxes would be lower because of this new revenue source. It’s really a winning situation across the board.
A positive economy including reduced cost of operation and security are big - all attributable positives to agriculture.
If we get real specific to the agriculture arena, fertilizer costs can be addressed in a better setting with energy self-sufficiency. Natural gas is certainly a component of fertilizer development. When you have prices of $3 a cubic foot, rather than $14, it means the cost of producing everything, petrochemicals and other things including fertilizer is significantly less. Certainly for petrochemicals we’re the second lowest-cost producer in the world.
At API, we always encourage everyone to read up on what the new development technologies are and the positive economic impact instead of the media parroting back the anti-fossil fuel folks. For example, hydraulic fracturing has actually been used safely for 60 years and it’s properly regulated by the states.
The fracturing technique itself has never been demonstrated to cause problems with water supplies, which of course farmers are concerned about, as they should be. Industry improvements in development and refining continue to advance. As an industry, we’re compelled to improve to protect the environment, add jobs, lower costs of production and more - the very same strategies farmers focus on to advance agriculture.
Arizona Agriculture: Would there ever be a day when agriculture is competing with oil and gas for water resources?
Felmy: Overall, the gas and oil industry is a fairly low water user. Plus, the industry is working very hard to maximize our opportunities to recycle water in the production process. I believe we’ll be able to co-exist on this issue in the future. It’s a cost consideration for us too since the more water you use the more expensive the process.
Regardless of America’s oil and gas future, from this interview we discover North America is sitting on more resources than we could have ever imagined. The bigger question is, “What will we do with the opportunity?” I’m betting on America to do the right thing and usher in the Oil Boom 2.0.
Editor’s note: For more information on the oil and gas industry and the new technologies spurring a renewal in American energy go to www.api.org, The Groundwater Protection Council and the International Institute for Strategic Studies.