La Jolla Conference: Regulations still constraining unconventional energy development

While unconventional oil and gas production in the US remains mostly resilient amid the industry downturn, energy policy under the Obama administration hasn’t made things easier on companies forced to cope with new market realities, panelists said on May 20 during the XXIV La Jolla Energy Conference in La Jolla, Calif.

Daniel Restrepo, senior fellow at the Center for American Progress, observed that politics in the US haven’t advanced since the beginning of the shale production boom, and he doesn’t expect much to change ahead of the 2016 elections.

A hot topic at the event was the movement to remove the 40-year ban on crude oil exports led by legislation introduced this month from Sens. Lisa Murkowski (R-Alas.) and Heidi Heitkamp (D-ND) (OGJ Online, May 13, 2015).

Restrepo believes it will be “a hard lift” given the current political climate whereby elections are looming, and the export vote essentially hinges on unrelated, consumer-focused factors such as gasoline prices. He added that existing individual licensing provisions to export oil from certain fields to certain nations would only have minimal impact as a measure compensating for the ban.

He also was pessimistic on the possibility of a crude swap deal between the US and Mexico, explaining that anything related to Mexico is “more complicated” politically (OGJ Online, Apr. 6, 2015). Mexico already exports 900,000 b/d of heavy crude to the US, which in 2010 received 71% of Mexico’s overall oil exports (OGJ Online, Apr. 23, 2015).

Murkowski and Heitkamp also in February led a coalition asking US Sec. of Commerce Penny Pritzker to encourage the administration to authorize crude exports to Mexico under the same conditions established for those to Canada—the type of move Restrepo believes falls on deaf ears (OGJ Online, Feb. 18, 2015).

Mark Zoback, professor of geophysics at Stanford University and director of Stanford Natural Gas Initiative, also bemoaned the current regulatory regime, singling out as unnecessary the new rule from the US Bureau of Land Management requiring disclosure of chemicals used in frac fluid, explaining that frac fluids aren’t an environmental issue but rather it’s well construction that’s been problematic (OGJ Online, Mar. 20, 2015).

“We’ve drilled a number of wells improperly,” said Zoback, adding that “it’s sad the fear of fracing has governed people’s knowledge.”

Bullish on natural gas

Regarding LNG exports, Mark Stubbe, senior vice-president of marketing and trading at Cheniere Energy Inc., never saw the US government and regulatory environment as an impediment to his company’s goals because, after all, “The rules are the rules," he stated.

Stubbe said this mindset enabled Cheniere to get a head start over its competitors on LNG exports. The first train at its Sabine Pass LNG export facility is slated for startup by yearend, and earlier this month the company received clearance from the US Department of Energy to export LNG from its liquefaction project near Corpus Christi, Tex., to countries without a Free Trade Agreement with the US (OGJ Online,  May 14, 2015).

Zoback sees adding LNG exports to the world market as a “price stabilizer,” and predicts more gas will be produced, used, and exported in the future. He noted that Royal Dutch Shell PLC just went “all-in” on gas with its $70-billion acquisition of BG Group PLC (OGJ Online, Apr. 8, 2015). Major companies want low carbon alternatives to meet increasingly stringent emissions rules, and gas is the best alternative to cheap and abundant coal resources, he said.

Stubbe still views the US as a “premier resource” in the world because of its existing infrastructure and industry. He believes the current industry downturn isn’t like the one that occurred in 1986 because back then there wasn’t accommodative monetary policy with loose credit, or an overall systematic way of looking at cost. The US is “price sensitive” but not “price dependent,” he said.

Stubbe believes the US will continue to innovate in spite of low oil and gas prices, which will keep the country competitive with Russia in the European gas market despite geographic limitations. Zoback also sees the incentive for continued advancement within the US, noting that 150,000 multistage frac horiztonal wells have been drilled in the country but companies are only recovering 25% of the resources.

Concerns about Latin America

Panelists agreed that development of the unconventional oil and gas resources in Latin America is also threatened by unfriendly regulatory regimes.

Restrepo explained that the worst parts of the debate in the US, including misconceptions about fracing, have been transferred to Latin American countries such as Colombia that are looking to develop their resources. He emphasized that greater transparency in the US will make unconventional objectives easier to achieve in the region.

Latin American countries should bring lots of key stakeholders together during the early stages of the regulatory process to ensure smooth energy development, he said. Zoback believes those countries need to get rid of duplicate and overlapping government and regulatory agencies to ensure a more efficient and welcoming business environment.

Stubbe, however, said that credit is the No. 1 concern for companies looking to invest in Latin America. He noted the “credit system is broken” in countries such as Brazil, Argentina, and Venezuela, where the economies are struggling and resources are most plentiful.

Contact Matt Zborowski at matthewz@ogjonline.com.

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