Why US Natural Gas production will continue to grow strongly

The U.S. Energy Information Administration (EIA) has predicted that natural gas production in the US will continue to grow at an impressive pace. Right now output is close to 70 billion cubic feet a day.

The U.S. Energy Information Administration (EIA) has predicted that natural gas production in the US will continue to grow at an impressive pace. Right now output is close to 70 billion cubic feet a day and is expected to reach over 100 billion cubic feet per day by 2040. The trend is likely to continue without hitting a geologic “peak”, and along with this trend will come new marketing opportunities for America.

In an exclusive interview with Oilprice.com, EIA Administrator Adam Sieminski discusses:

• What’s at stake in lifting the US crude export ban
• Whether lifting the ban is inevitable
• Why energy-related CO2 emissions will likely climb this year
• What we can expect from US coal output through 2014
• Why US natural gas production will continue to grow strongly
• Where we can expect (unexpectedly) new production to come from
• Why Alaska just might surprise us
• Where the biggest new shale opportunities lie
• How production increases might come from ‘non-shale’ formations
• The potential for Colombian shale
• What to expect from Mexico’s reforms
• What the Panama Canal expansion really means
• Why we will see new marketing opportunities for the US

Interview by James Stafford of Oilprice.com

Oilprice.com: US mainstream media are heralding the debate over lifting the US crude oil export ban as potentially one of the most critical for this year. While most agree this is not likely to happen anytime soon, is it an eventuality?

Adam Sieminski: When I first took office at the EIA, I said that light sweet crude oil production was growing very rapidly, and that it would ultimately have a number of impacts on the energy infrastructure in the US; for instance, that we would see changes in things like movement of oil by rail. We would see changes in refinery configurations designed to deal with light sweet crude. The Gulf Coast refineries in the US over the past decade were upgraded to run heavy sour imports, and so there are issues with the ability of refineries in the US to handle rapid increases in light sweet crude oil production.

I noted at the time that at some point, policymakers were going to be confronted with all of these changes resulting from the enormous shift in thinking about US production growth. Five or 10 years ago, everybody thought that US oil production would just go down, and demand would always go up. Now we have in the EIA’s forecast over the next five years very strong growth in crude oil production and weak growth—if not negative trends—going on in gasoline and liquid fuels demand. This creates an interesting atmosphere.

Is lifting the crude export ban inevitable? I’m not sure that anything is inevitable. Certainly what I’ve learned in the last five years is that the inevitable declines in production and growth in demand didn’t come true.

Oilprice.com: What are the congressional hurdles faced here?

Adam Sieminski: I don’t know that there’s a hurdle. That’s a question that’s going to be dealt with by policymakers. Energy policy issues generally tend to involve environmental concerns, national security concerns, and economic concerns.

The biggest hurdle that congress faces is just having good information on future trends in supply and demand, refinery configurations and pipeline and railroad transportation infrastructure.

Oilprice.com: What would be the consequences of lifting this ban, for the industry, for refiners, for consumers?

Adam Sieminski: Well, that’s going to be part of the debate. I don’t have the answer to that, and I doubt that anybody at this point has the complete answer to that question. What is the economic impact? Does it increase jobs or not? What is the environmental impact of producing, moving and refining the crude oil? What are the national security implications? Is it better to keep the oil here, or to move it into global markets where it might have an ameliorating effect on volatility? There are a lot of questions, so I’m not going to try to pre-judge that debate.

Oilprice.com: The EIA has noted that after two years of declining production, US coal output is expected to increase in 2014, forecast to rise almost 4%, as higher natural gas prices make coal more competitive for power generation. At the same time, there is concern about the EPA’s proposed new carbon emissions standards for power plants, which would make it impossible for new coal-fired plants to be built without the implementation of carbon capture and sequestration technology, or “clean-coal” tech. Is this a feasible strategy in your opinion?

Adam Sieminski: Well, the facts as you laid them out are certainly what the EIA is looking at. Natural gas prices have gone up, so in 2013, we already saw some recovery in coal at electric utilities. As a consequence, energy-related carbon dioxide emissions actually climbed in 2013 and probably are going to do so again in 2014 for the reasons that you stated.

Longer term, even without changes by the Environmental Protection Agency, there’ll be coal retirements, and the amount of coal being burned in the US will eventually come below the amount of electricity being generated by natural gas. So sometime after the year 2030, we will have more electricity in the US being produced from natural gas than from coal.

Oilprice.com: What can we expect from US onshore natural gas production over the next two years; over the next five years? And where will production increases offset declines?

Adam Sieminski: Well, the EIA has been pretty clear on this in our Annual Energy Outlook Reference case for 2014, which we published in mid-December. We reiterated what we said the previous year: natural gas production in the US is going to continue to grow very strongly. We are close to 70 billion cubic feet a day of output now. That number will be over 100 billion cubic feet a day by 2040. Shale gas will be easily 50% or more of production by 2040.

We also see increases in natural gas production from geologic formations that we don’t consider to be shale gas. We think that there might also be some production, believe it or not, from Alaska, because the economics ultimately will favor construction of an LNG facility in Alaska that would allow production from the associated gas in the North Slope of Alaska.

Just in the last five years, we’ve seen natural gas production in the US from shale go from about five billion cubic feet a day to nearly 30 billion cubic feet a day--a huge increase. A lot of that is coming from places like the Haynesville—and more recently the Marcellus in Pennsylvania and West Virginia. In our view, those production trends are going to continue without the likelihood of running into a plateau from a geologic standpoint.

Oilprice.com: How do you see future extraction, development and commercialization of oil and gas resources in the Americas playing out over the next 5-10 years?

Adam Sieminski: Well, the big new opportunities, I think--certainly in the US and Canada--lie in the development of shale resources. There are oil and gas shale resources in places like Argentina, Mexico, Columbia, and elsewhere across the Americas. Whether or not the very rapid development of shale resources in the US can be duplicated in a lot of other countries—even in the Americas—remains to be seen. Certainly there has been some interesting progress in developing shale resources in Canada and Argentina.

I’ve been hearing from many people that they’re quite hopeful there will be developments in shale in Colombia, and given the constitutional changes that have now been agreed in Mexico, that opens up an opportunity for Mexico to step into this area.

One of the things that is happening is the increase in oil production in the US and the fact that we have very sophisticated refineries with very strong technology, while relatively low natural gas prices are allowing us to run our refineries at higher utilization rates and dispose of surplus products—by exporting petroleum products like gasoline and diesel fuel—into Latin America and Canada.

In a sense, this creates a manufacturing opportunity for the US to take a raw material, process it, and sell it abroad. It also fits in pretty well with the fact that a number of countries in Latin America have had difficulty in building and upgrading their own refineries. So it’s opened up a marketing opportunity for the United States to take advantage of.

Oilprice.com: What can we expect from Mexico’s recently adopted energy reforms and what regional effect could this have?

Adam Sieminski: Well the Mexican government and Pemex, the state oil company, are very excited about the opportunities they see for Mexico to increase its production and to take advantage of some of the new technologies that are available through cooperation with non-Mexican companies. They believe that it is going to be instrumental in reversing some of the difficulties they’ve had in oil production and natural gas production.

It certainly looks to the EIA as something that we’re going to have to watch very carefully when considering the longer-term outlook for Mexican energy production.

We actually bumped up the Mexican numbers because of the opportunities we think will be created by constitutional reform there. If the implementation of that proceeds along the lines that the Mexicans are considering, I think we’ll probably have to look at it again.

Oilprice.com: In its latest report, the EIA notes that the Americas accounted for 20% of global natural gas trade, and while 80% of that was via pipeline, the rest was traded as LNG. How do you see this proportion changing over the next 5-10 years?

Adam Sieminski: Well, I suspect that we’re going to see more of both. Our longer-term outlook shows US pipeline exports of natural gas to Mexico going up, and we also see LNG exports from the United States increasing. We’re not responsible for permitting. What we try to do is look at the economics. We run our national energy modeling system to basically say, “What would the economics do if you let them run?” And that shows we’re likely to see increases in exports of both LNG and pipeline gas.

Interestingly, the model also says that there’s plenty of production to do that and still allow demand in the US to go up considerably. We’re seeing demand increases in natural gas use by refineries; it’s a big refinery fuel. And in the industrial sector, we see significant gains in natural gas consumption occurring in areas like bulk chemicals, food processing, and elsewhere. And then the biggest increases in natural gas may come from electric utilities, which will likely be using more natural gas relative to coal to provide electricity growth in the United States.

Oilprice.com: Is the US Department of Energy moving too quickly or too slowly to approve LNG exports to non-FTA countries?

Adam Sieminski: I think that the Department of Energy’s Department of Fossil Energy, which is responsible for permits, is moving exactly the way it should under the law to make the kinds of findings necessary from a legal standpoint. I wouldn’t characterize it as too fast or too slow. I would say that from what I can see, it’s just right given the legal framework.

Oilprice.com: When could we expect the US to become a net gas exporter?

Adam Sieminski: The EIA’s forecast is that the US will become a net exporter of natural gas before the end of this decade.

We’re already a net exporter of coal. In terms of electricity, most of our trade is with Canada, and that never really seems to have been much of an issue. The US is also a net exporter of petroleum products, so we now export more gasoline and diesel fuel than we import. We import a lot of oil products, particularly into the East and West Coasts. But we are a big exporter, mostly from the Gulf Coast, with the increase in refinery utilization down there. The overall picture now is one in which the US trade deficit is being reduced by growing oil and petroleum product exports.

The only big outstanding question is: could the US potentially be a net exporter of crude oil? In the EIA’s Reference case forecast, that doesn’t seem likely. Despite the fact that our production is rising while demand is falling, we’re still importing about five million barrels a day net of of crude oil and products. It doesn’t seem likely that net importsd are going to go to zero--at least not given the facts as we currently see them. It’s possible, in a high petroleum resources case combined with a technology and policy-driven low demand case, but not probable.

One thing you want to keep in mind is what it would mean, exactly, if the US were completely self-sufficient in energy. Some people like to use the phrase, “energy independence.” We would still be part of a global trading system in energy, and particularly petroleum products and crude oil. And if oil prices go up globally, they’re going to go up in the United States. If there’s a geopolitical problem somewhere or a weather problem somewhere—anything—the US would be impacted just as it has always been. The US has a lot of interest in what’s going on around the world, in the Middle East and elsewhere, regardless of whether it is independent or self-sufficient in fuels. Those political and economic interests will remain whether we become an exporter or not.

Oilprice.com: What role will the expansion of the Panama Canal play in this?

Adam Sieminski: What they’re doing is widening the Panama Canal. They’ll make the Canal itself wider and the locks longer, and the net result will be the potential to save in transportation costs through the use of larger oil tankers and LNG tankers. This offers an opportunity to reduce the costs associated with global trade. It is something that I know Panama and all of the customers who use the Panama Canal are very interested in seeing happen. There have been some cost and labor issues, but I’m sure those will be resolved and this expansion will eventually be completed. When that happens, it’s going to reduce the cost of moving goods back and forth between the Atlantic and the Pacific, and that’s going to apply particularly to things like liquefied natural gas and oil.

Rising tide for Gold, Silver as money velocity accelerates

By Dr Jeffrey Lewis

The wall of fiat money created over the last five years is staggering, offset only by the stasis that pervades its exchange. Money velocity is the key variable that
will signal the character of confidence and the next wave of inflation.

Money mechanism for money velocity

One common denominator for all documented hyperinflations, including those of so-called reserve currencies, has been an increase in the velocity of money. Velocity of money is the speed with which money changes hands in the economy; or more specifically for modern times, the financial system.

Government spending, in the form of basic services, will provide the fuel to bid prices.

There are no guarantees in life...except death, taxes, and debasing unbacked currencies. Here's something to help with the tax part. Economically Speaking...

Organic growth is abysmal, especially when one considers the gross national product, or the production that occurs within geographic borders. The difference is magnified by the great explosion of fiat in the worldwide race to debase currencies, where foreign exchange distorts the true productive capacity of the underlying economy.

Job growth, of course, remains abysmal. Wages are stagnant and the labor participation rate continues at multi-decade lows.

The currency being created by the latest experimental bond buying program continues to pile up as excess reserves in the Fed's account.

The banks are not lending money into the economy at nearly the same rate that it is being created by the Fed.

The un-rideable storm

To the extent possible, we've avoided dropping ocean analogies into these letters. However, the lessons learned from studying the ocean and directly experiencing its energy can be appropriate on occasion.

The train of ocean energy that every surfer dreams about is called a ground swell. A large storm forms thousands of miles away, with hundreds of miles of sustained high wind for days. It is the
equivalent of dropping a large bolder into a calm lake. As the energy radiates outward, the waves organize into groups of traveling trains. The groups are often separated by long periods or lulls that induce a false sense of complacency.

When the energy is expended where local conditions are calm, we experience an organized form of chaos, accessible for those who choose to take part in the energy.

But when the local conditions are unstable, or if the swell comes in with a storm, the last place anyone should be is in the zone of exploding wave energy. This is because the local wind causes the organized train to accelerate geometrically.

There are two lessons applicable to the current state of monetary dynamics.

The first is that the storms have formed all over the world. Staggering amounts of money have been dropped like a thousand boulders into the ocean of existing liquidity.

The second is that like all storm energy, information (like current position and size) are readily available. The unknown variable is the timing of its arrival and its velocity.

As money velocity accelerates

Acceleration is added when the local conditions are stormy; creating the veritable "Victory at Sea" that threatens everyone in its vicinity.

No one entity or body has the ability to understand a non-linear system like the U.S. or world economy. Some argue that if it is able to go on everyday like it has, that is a sign of its robustness or sustainability.

Again, there is no way that the planners have a total grasp of what they are doing. Complex systems can be tweaked, but the effects are impossible to predict - except that they unravel in a geometric sense. There is no way to alter the weather, much less a storm of this
magnitude.

The final countdown

We've created a thousand 100 year storms that threaten the entire global economic system. The movement of this money into the depressed conditions that (unknowingly) await its arrival will leave no one untouched.

The time for life boats is now - while the storm can be contemplated, the energy observed, and the acceleration is calm.

The world will continue its printing experiment and we may look like the cleanest shirt for a while - as long as confidence and brainwashing can hold.

The storm has been created. The time needed for it to arrive is what we should be most concerned about. Acceleration will happen when it comes closer to shore.

Silver and gold, of course, will float along with the rising tide.

Zinc: Bullish fundamentals to start impacting markets in 2014

The other part to the supply picture is China, where growth is slowing sharply. After years of double-digit percentage growth, mine production grew only 4% in 2013.

The long anticpated supply tightening in zinc is emerging as recent zinc mine corporate data suggests, according to Barclays Plc.
Barclays which tracks close to 20% of global supplies reported that major zinc producers have reported 4% lower production on a year on year basis with ouput contracting at half the mines.

"During 2013, zinc performed fairly better than its peers from the base metals complex, fetching a marginal negative return of 0.57%. In the year 2011, zinc prices plummeted by 24%, the most among other base metals on the back of supply surplus and high legacy inventory," according to Nirmal Bang Commodity Year Book 2014.

At India's Multi Commodity Exchange, Zinc for February delivery has fallen from a high of Rs 130.35 last week to Rs 126.40 on Monday trading.

Mine supply data
-GlencoreXstrata's Q4 13 results show production dropped 9% y-o-y t due to shuttering of two big mins Perseverance and Brunswick.
-Blackthorn Resources has suspended open pit opertions because of weak metal prices and unaccpetable financial results.
-Data from the International Lead and Zinc Study Group (ILZG) this week further illustrated
the softer ex-China production performance: ex-China mine production did not grow at all
in 2013.

The other part to the supply picture is China, where growth is slowing sharply. After years of double-digit percentage growth, mine production grew only 4% in 2013. That’s even slower than the official data suggest; NBS data show Chinese production up 9% y/y. In the past, Chinese production tended to surprise to the upside, and that certainly remains a risk.

"We think some mines could resume production given a strong enough price signal, but this is only likely at the margin. The industry is fragmented, inefficient and suffering from a sharp decline in ore head grades. Thus, the scale and sustainability of any future upside supply surprises are likely to be limited and high-cost.

"Overall, we think the parts are starting to fall into place for supply-driven tightening in zinc fundamentals. However, we expect this to develop gradually. Concentrate and refined metal stocks will provide an initial buffer: we estimate unreported stocks of refined metal built by 600Kt last year, for instance. It could attract on-exchange during periods of tightness in spreads, which happened nine times in 2013, and could restrain backwardations, temporarily at least. We think there are reasons to be bullish on zinc prices on a 12-month view and see more than 10% upside between now and the end of 2014, with most of that happening in H2 14 with Q4 14 prices forecast to average $2,200/t," Barclays report said.

Nirmal Bang Pvt Ltd, a leading broking house said in its Commodity Year Book 2014 that the global refined zinc market is currently under-supplied by 18,000 tonnes in the January-November period of 2013 as compared to the surplus of 179,000 tonnes same period last year. In 2014, we expect the years of surplus in the zinc market to shrink and turn into deficit on the back of supply shortages and increase in demand growth.

Global mine production is expected to increase by only 1.5 percent in 2013 and 2% by 2014 due to limited new mine additions and major mine depletion taking place by 2015 and 2016. Also, new supply of zinc miners is at an early pre-funding stage and is located in countries with high sovereign risks.Global refined zinc production is expected to have risen by 3.5% and 3.8% in 2014 with China’s production alone rising by 9.5% from last year while the production from Europe, the second largest producer is expected to rise marginally by 1.5% in 2013.

"Zinc is going through a structural shift on the supply side, creating a bullish outlook for zinc prices. During the year 2013, the surplus is expected to narrow down due to strong consumption growth and mine closures, and we are of the opinion that the surplus would turn into deficit in the year 2014. The level of underlying demand for zinc, coupled with the fact that new mine supply would not being added, could lead to the emergence of tightness in supply side over the next two years. Demand from the US, Europe and China is expected to drive consumption higher as the US and Europe are recovering and growing and we also expect China to slowly recover from credit crunch and shadow banking concerns after the second half of 2014. Therefore, we are firmly believe that zinc prices are expected to behave positively and we recommend one to buy LME zinc around $1,900 per tonne for the annual target of $2,350 per tonne," Nirmal Bank Commodity Yearbook said.

More Snow Ahead for U.S. Northeast as Storm Moves to Sea

Another round of snow will sweep across much of the U.S. Northeast overnight as a winter storm that grounded more than 11,000 flights and knocked out power to hundreds of thousands in the past three days starts to move into the Atlantic.

New York and Boston could easily pick up a few more inches and accumulations in parts of Pennsylvania and central New England may reach close to 20 inches (51 centimeters), said Alex Sosnowski, a meteorologist with  AccuWeather Inc. in State College, Pennsylvania.

“There will be another batch of snow that swings up this evening, probably late tonight in New York and then Boston will get it in the wee hours of the morning,” Sosnowski said. “Some folks could conceivably clear off their snow and then wake up tomorrow with more snow on the ground.”

At least 20 deaths were linked to the storm as it swept out of Texas and up the East Coast, the Associated Presssaid.

Since Feb. 11, 11,313 flights throughout the U.S. have been canceled, said FlightAware, a Houston-based airline tracking service. As of 6:46 p.m. New York time, 6,484 were scrubbed today, including about 86 percent from and 85 percent to Washington’s Reagan National Airport.

The storm knocked out power to 742,603 customers in 11 states from Texas to New Jersey as of 2:30 p.m., according to an Energy Department report that didn’t count blackouts involving fewer than 1,000 customers.

Power Out

Georgia and South Carolina were the hardest hit. At least 344,365 customers, or 7 percent of Georgia’s users, were without power, while in South Carolina it was 224,455, or 9 percent, the department said.

Government offices in Washington shut, and public school classes were canceled in Philadelphia and Washington. Philadelphia schools will be closed tomorrow as well. Rail service between Washington and Boston operated on a reduced schedule, Amtrak said in a statement.

In Central Park, 9.5 inches were on the ground as of 1 p.m., and the weather service increased its projections for New York to 10 to 16 inches from 8 to 12. Three to 7 inches may fall overnight, the agency said. Boston’s Logan International Airport had 0.3 inch as of 2:07 p.m.

New York Governor Andrew Cuomo declared a state of emergency for New York City, Long Island and the mid-Hudson Valley. He urged motorists to stay off the roads.

The storm moved into the area with more strength than the computer models had forecast, said Joe Pollina, a weather service meteorologist in Upton, New York.

Models Missed

“The computer models didn’t pick up on a piece of energy that squeezed out all the available moisture,” said Gary Best, a meteorologist with Hometown Forecast Services Inc. in Nashua, New Hampshire.

Snow fell at a rate of 1 to 3 inches per hour in New York before that band moved north into New England, Best said. New York has had eight days this season with a snowfall of 3 inches or more, the most since 1960-61, said Weather 2000 Inc.

The South is struggling to recover from snow and ice that has been falling there for the past three days. As of 9 a.m., 19 inches were reported in Cherry Grove, West Virginia, 18 in Winchester, Virginia, and 15 in Saluda, North Carolina, according to the U.S. Weather Prediction Center.

A spotter trained by the weather service reported 18 inches in Greenville, Virginia, about 45 miles west of Charlottesville. Another spotter recorded 18 inches in Ballenger Creek, Maryland, about 43 miles north of Washington.

Washington Snow

Reagan National got 6.6 inches of snow and Washington may receive 2 to 4 more inches through the night, said Steve Goldstein, a weather service meteorologist in Sterling, Virginia.

“The worst of it is over but they’re still out there trying to clean up, and they’re going to be dealing with some more snowfall through the evening,” Goldstein said by telephone.

A half-inch or more of ice fell across a wide area of central Georgia, including in Augusta and Marietta, the Weather Prediction Center said. Three inches coated Forest Acres, South Carolina, where the state asked people not to drive until the storm passed.

After the current storm moves off toward the Canadian Maritimes, a second system is expected to move eastward across the U.S. tomorrow, Best said.

It will leave light snow on the central Great Plains through Ohio Valley tomorrow and reach the mid-Atlantic region by nightfall, Sosnowski said. There’s a chance it could strengthen over the Atlantic and bring snow to Boston this weekend.