Not all is rosy for new coal-fired plants. Last year, coal-fired generation fell from 48.2 percent to 44.6 percent of total U.S. electricity generation,[iii] as low natural gas prices raised the gas share, and higher water levels and wind turbine capacity increased the renewable share. While some states remain favorable to new coal-fired generation, others are tied up in legal opposition and regulatory hold-ups for permits. Nevertheless, many folks agree that the present difficulty of putting cap-and-trade legislation through the Senate is having positive effects on new coal builds.[iv]

Past Announcements vs. Operational Units

NETL has tracked announcements versus actual construction of units over time and has noted that escalating costs and uncertainty about whether climate change legislation would pass have caused fewer coal-fired power plants to be constructed than were originally announced. NETL’s 2002 report, for example, noted that over 36,000 megawatts of coal-fired capacity were to be built by 2007, while only 12 percent of that amount (4,500 megawatts) was actually constructed during that period. The figure below shows the announcements of coal-fired plants versus actual plant construction over the past decade.

Current Status

According to NETL, in 2009, 8 coal-fired plants, listed in the figure below, came on-line in the following states: Iowa, Kentucky, Colorado, Illinois, Nebraska, Texas, and Arizona. The laboratory categorizes future plant additions as announced, permitted, near construction, or under construction. A plant in the announced phase is in the early stages of development and may be filing for permits. A plant in the permitted phase either has two or more permits approved or its fuel or power contracts have been negotiated. A plant near construction has obtained approval and received the majority of its permits, has begun site preparation, and is contracting for vendors and Engineering, Procurement and Construction contractors.

As of January 2010, NETL reported that 46 coal-fired plants were announced (26,233 megawatts), 8 were permitted (3,280 megawatts), 1 was near construction (320 megawatts), and 22 coal-fired plants were under construction (13,755 megawatts)for a total of 43,588 megawatts in the pipeline. (See table below.) While plants under and near construction are likely to come on line, NETL warns that regulatory uncertainty and industry cost increases are impacting development decisions for all projects.

The EIA is a little less optimistic. In its Annual Energy Outlook 2010, it is forecasting that between 2008 and 2035, an additional 26,400 megawatts of coal-fired capacity will come on-line; of that, 15,600 megawatts are in the pipeline.[v] EIA’s assessment reflects their beliefs about regulatory and financial uncertainty in the cost of capital for coal-fired units, and assumes a 3-percentage point increase in the cost of capital when evaluating investments in greenhouse gas intensive technologies without carbon capture and sequestration (CCS) technology. The 3-percentage point adjustment is similar to a $15 per ton carbon dioxide emissions fee when investing in a new coal plant without CCS technology. The adjustment accounts for the possibility that the plants may need to purchase allowances or invest in other greenhouse gas emission-reducing projects that offset their emissions in the future.[vi]

The International Energy Agency is a little more optimistic than the EIA in its World Energy Outlook 2009, forecasting an additional 35,000 megawatts of coal-fired capacity above 2007 levels by 2030.[vii]

Regulatory Climate

In some states, coal is essentially banned or is having a very difficult time getting permitted. In California, for example, there is a de facto ban on new coal-fired plants resulting from a performance standard that requires all new base-load generation to produce no more greenhouse gas emissions than a new natural gas combined cycle plant.[viii] Washington State also has a de facto ban on new coal-fired plants, requiring a 20 percent offset in carbon dioxide emissions from new fossil fuel plants.[ix]

In Kansas, in 2008 and 2009, then-governor Kathleen Sebelius vetoed bills by the state legislature that would have allowed Sunflower Electric Power to build two 700-megawatt coal-fired power plants that had been originally rejected by a state environmental official because of its output of carbon dioxide emissions. Once Kansas Governor Sebelius became a cabinet secretary in the Obama Administration, the atmosphere turned more favorable. The new Kansas governor, Mark Parkinson, is allowing one new coal-fired plant to be built.[x]

In Georgia, a state where coal is the primary fuel for electric generation, Longleaf, the first coal-fired power plant to be built in more than 20 years, is tied up in litigation. In late June 2008, Fulton County Superior Court Judge Thelma Wyatt Cummings Moore overturned the decision by state regulators to issue the plant an air permit, saying state environmental officials failed to take the plant’s carbon dioxide emissions into consideration. In her decision, Moore said the plant would annually emit large amounts of air pollutants, including nine million tons of carbon dioxide (even though carbon dioxide was not defined as a regulated pollutant at the time). In November 2008, the plant owners appealed the decision to the State Court of Appeals. In July 2009, the Court of Appeals overturned the decision, but left the plant’s permit invalid. In September 2009, the Georgia Supreme Court ruled that they would not hear an appeal by the Sierra Club against the previous ruling. While the Sierra Club appealed to the court to reconsider, the Georgia Supreme Court held to their prior ruling. In April 2010, the state Environmental Protection Division issued two amendments to the permit, but failed to allow enough time for public comment. The plant is on hold while the state determines when they will provide the documents for comment.[xi]

In New Mexico, the Desert Rock coal-fired power plant, whose permit was originally approved by the Environmental Protection Agency (EPA) under the Bush Administration. The permit, however, was withdrawn by the same EPA during the Obama Administration, citing inadequate analysis of environmental issues and a failure to use the appropriate technology, coal gasification combined cycle. The plant was to use supercritical coal technology and meet standards defined by the International Energy Agency for carbon capture and storage, allowing it to be retrofitted for future deployment of the coal-gasification technology when it becomes commercially available. The 1,500 megawatt plant was to serve parts of Arizona, New Mexico, and Utah, using Navajo Nation coal resources. According to the President of the Navajo Nation, the EPA is holding it accountable to higher standards than other parts of the United States. In April 2010, the power plant owner indicated that the project was not dead, but it is no longer clear what fuel the owner will use—fossil or renewable.[xii]

China’s Reliance on Coal

It is important to remember the big picture. Carbon dioxide emissions are global emissions, in that reducing them in the United States does not guarantee an absolute reduction. For example, unlike the United States, China has no qualms of dramatically increasing its coal-fired electricity generation and carbon dioxide emissions.

China currently gets 70 percent of its energy and 80 percent of its electricity from coal. China is the largest producer and consumer of coal in the world, and many of China’s large coal reserves have yet to be developed. The country currently ranks third in coal reserves, after the United States and Russia, with 13 percent of the world total.[xiii]

The EIA is projecting that those percentages will change very little in the future, despite the so-called lead that the U.S. administration says China has in green energy. By 2035, EIA expects China to get 62 percent of its energy and 74 percent of its electricity from coal. The statistical agency expects China to add 737 gigawatts of coal-fired capacity to its existing 496 gigawatts, an increase of about 150 percent. China’s coal-fired capacity in 2007 exceeded that of the United States by over 180 gigawatts and the additions that China is expected to make to coal-fired capacity by 2035 will be more than double the current coal-fired capacity in the United States. In fact, the forecasted coal-fired capacity of China in 2035 (1233 gigawatts) exceeds the total capacity of all types forecasted for the entire United States in that year (1216 gigawatts).[xiv]

The International Energy Agency (IEA) is also in agreement that China will be building a massive number of coal plants in the future. Their forecast has an additional 773,000 megawatts of coal-fired capacity being constructed by 2030 from 2007 levels, surpassing the total generating capacity in the United States in 2030. They also expect China’s electricity sector to be mainly coal fired, with coal producing 75 percent of the country’s electricity in 2030.[xv]

NETL also agrees with EIA’s and IEA’s outlook regarding construction of coal-fired capacity as the figure below indicates. During the past decade, China has been building 10 to 70 gigawatts of coal-fired capacity each year, and it has about 185 gigawatts planned.

The chart below shows the dramatic difference between the Chinese and American build-rates for coal-fired generating capacity. The blue and green bars show China’s new coal-fired capacity, built, under construction, and planned, and they are compared to the red and yellow bars for the U.S.’s coal fired capacity that are operational and under construction. The announced U.S. plants have been so tentative in the past that they are not included on the chart.

Conclusion

While the current outlook is somewhat brighter for coal-fired power plants here in the United States, their ability to compete with natural gas and renewable technologies is hampered by uncertainty over legislation and regulation, along with legal delays. Congress has had various proposals for a cap and trade bill to limit greenhouse gas emissions, but to date only the House of Representatives has passed their version of the bill. In the mean time, the EPA is planning to limit those emissions through regulation. Coal’s fate in this country is still uncertain, but China realizes that coal is its answer to economic growth, providing the energy it needs to improve the living conditions of its population.

[ii] Energy Information Administration, Electric Power Monthly, http://tonto.eia.doe.gov/ftproot/electricity/epm/02260904.pdf, http://tonto.eia.doe.gov/ftproot/electricity/epm/02261003.pdf, http://tonto.eia.doe.gov/ftproot/electricity/epm/02261008.pdf

[iii] Energy Information Administration, Monthly Energy Review, http://www.eia.gov/emeu/mer/pdf/pages/sec7_5.pdf

[iv] Associated Press, America’s New Coal Boom, August 17, 2010, http://www.google.com/hostednews/ap/article/ALeqM5iCjlywOJyCu1MSGH7FUqj7jD1c1QD9HL5RUO2

[v] Energy Information Administration (EIA), Annual Energy Outlook 2010, Table 9, http://www.eia.doe.gov/oiaf/aeo/aeoref_tab.html

[vi] Energy Information Administration, Annual Energy Outlook 2010, http://www.eia.doe.gov/oiaf/aeo/electricity_generation.html

[vii] Organization for Economic Cooperation and Development, International Energy Agency, World Energy Outlook 2009.

[viii] Institute for Energy Research, Energy Regulation in the States: A Wake-up Call, http://www.instituteforenergyresearch.org/states/california/

[ix] Institute for Energy Research, Energy Regulation in the States: A Wake-up Call, http://www.instituteforenergyresearch.org/states/washington/

[x] The Washington Post, Gristmill: What’s not the matter with Kansas, July 10, 2008, http://www.washingtonpost.com/wp-yn/content/article/2008/07/15/AR2008071500930.html, and http://www2.ljworld.com/news/kansas/energy/sunflower/

[xi] Wall Street Journal, February 4, 2008, http://blogs.wsj.com/environmentalcapital/2008/02/04/wall-street-tells-big-coal-not-so-fast/?mod=WSJBlog , April 2, 2008, http://blogs.wsj.com/environmentalcapital/2008/04/02/bank-of-america-more-heat-on-coal/ , August, 13, 2008, http://blogs.wsj.com/environmentalcapital/2008/08/13/burning-cash-coal-friendly-banks-under-fire/, and http://www.sourcewatch.org/index.php?title=Longleaf

[xii] The New Mexico Independent, EPA plugs the plug on Desert Rock coal-fired power plant, April 28, 2009, http://newmexicoindependent.com/26011/epa-pulls-the-plug-on-desert-rock-coal-fired-plant , Greenwire, COAL: Extension granted for appeals of N.M. power-plant permit , August 22, 2008, http://www.eenews.net/Greenwire/2008/08/22/8, and The Navajo Times, Desert Rock not dead, April 15, 2010, http://www.navajotimes.com/news/2010/0410/040810desertrock.php

[xiii] Energy Information Administration, http://www.eia.doe.gov/emeu/cabs/China/Coal.html

[xiv] Energy Information Administration, International Energy Outlook 2010, http://www.eia.doe.gov/oiaf/ieo/index.html

[xv] Organization for Economic Cooperation and Development, International Energy Agency, World Energy Outlook 2009.

CONTACT: LAURA HENDERSON

AUGUST 25, 2010

202.621.2951

Spill Commission has Opportunity to “Make it Right”
Interior Department’s Gross Distortion of Facts Requires the Commission to Set the Record Straight

WASHINGTON – In an attempt to insert facts into the debate about the United States’ offshore drilling policies, the Institute for Energy Research (IER) today prepared testimony for the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling’s public hearing in Washington, D.C. IER President Thomas J. Pyle released the following statement about his testimony.

“The energy debates in Washington are riddled with misinformation at every level. Contrary to President Obama’s rhetoric, this nation is blessed with plentiful energy resources. In spite of Interior Secretary Salazar’s claims, the previous Administration did not implement a drill “anywhere, anyhow” policy. As long as President Obama and Secretary Salazar continue to do everything within their power to perpetuate these and other fallacies, our nation will continue to unnecessarily rely on unstable foreign regimes to meet our energy needs. The offshore moratorium is an affront to the men and women who used to wake up every morning and produce the much-needed energy resources we need to fuel our cars and cool our homes.

“I urge the Spill Commission to use today’s hearing as an opportunity to set the record straight. The Administration’s moratorium on deepwater drilling, and its de facto moratorium on shallow water drilling, is killing the already burdened Gulf Coast economy. President Obama, please let a serious crisis go to waste and put the American people back to work safely producing the energy that this nation so desperately needs to power our economy out of the wilderness.”

###

Pyle: One job killed as a result of reactionary government policy is one job too many

WASHINGTON – In response to news reports detailing the Administration’s misguided approach to the economic and employment impacts its drilling moratorium has had on Gulf Coast communities, Institute for Energy Research President Thomas J. Pyle released the following statement.

“When we first learned that the Administration would halt all deepwater exploration in a misguided attempt to respond to the oil spill, we had to assume that they just didn’t understand the importance of the industry and the thousands of jobs it provides to the communities along the Gulf Coast. After all, what government would knowingly and purposely put thousands of its citizens out of work? But now we learn that it wasn’t a lack of knowledge about the consequences that led to the unwarranted policy, it was an outright lack of concern for the livelihoods of these hardworking Americans.

“Moreover, in addition to this premeditated destruction of jobs in the deepwater, the Administration is starving the workers in the shallower waters of the Gulf by slow-walking the permit process. It now appears that even if the Administration lifts the moratorium, their deliberate stonewalling in the shallow waters of the Gulf will kill any hope of jobs and American energy production.

“While one could reasonably assume that this should be self-evident, it appears the American people need to send a message to the President, his Interior Secretary Salazar, and his offshore regulator, Michael Bromwich: one job killed as a result of a reactionary government policy is one job too many. While you write memos and hold hearings, Gulf Coast residents are suffering. And they don’t want handouts, they want their jobs back. Now is the time to end this moratorium and let these men and women to get back to work providing the American people with affordable, reliable, domestic energy.”

###

“The Administration continues its assault on US energy production, this time trying to convince us that a shortage of paperwork led to the Gulf spill.  No amount of Government Green Tape would have stopped the spill, and in fact, Americans saw that it actually made cleanup harder.

“The Administration continues to ship our energy security and our jobs overseas, and all this is just another example of their energy extremism.  And with this Administration, extremism in defense of dogma is putting the American economy in a vise.”

FOR IMMEDIATE RELEASE:
August 17, 2010
CONTACT:
Laura Henderson, 202.621.2951

History and Projections

Just a short seven years ago, China consumed less than half the energy that the United States consumed.[iii] By 2009, China had not only caught up with the United States as far as energy consumption was concerned, but consumed almost 4 percent more energy than the United States, which was suffering from an economic downturn. According to the IEA, China consumed 2,252 million tons of oil equivalent last year, compared to 2,170 million tons of oil equivalent consumed by the United States.[iv] China’s economy and energy demand have grown at breakneck speed as it has become the world’s leading exporter, and it stands poised to overtake the United States in manufacturing output in 2011. [v]

The United States is the largest consumer of energy on a per capita basis, according to the IEA, using about 5 times the amount of energy as China per inhabitant, in part because of the much wider use of personal transportation in the United States. [vi] However, sales of automobiles in China have now outstripped those in the United States.[vii] So that U.S./China per capita ratio is not likely to continue for long.

China recorded its largest oil demand in June of 2010 at 8.98 million barrels per day, 10 percent higher than a year before, and 0.7 percent higher than May 2010, the previous record.[viii] And China is expected to build an additional 1,000 gigawatts of generating capacity, about the total U.S. electric capacity base, in the next fifteen years, according to the IEA.   In contrast, growth in U.S. energy demand has been reduced by the recession, efficiency and intensity improvements, and regulations, while supply has been constrained by opposition to all forms of non-renewable energy and its transport.

The Energy Information Administration projects that by 2035, China will have a total of 1,924 gigawatts of electric generating capacity, compared to 1,216 gigawatts for the United States, with an annual growth rate of over 5 times that of the United States. [ix] Over 60 percent of that new generating capacity is projected to be coal-fired. And while there are “clean” coal technologies for removing sulfur dioxide and nitrogen oxide, there is no commercial technology as yet for removing carbon dioxide emissions. Thus, the EIA projects that China’s carbon dioxide emissions will be over twice that of the United States by 2035, with its emissions from coal being 4.5 times as much as those in the United States.[x]

Global Carbon Dioxide Emissions

According to the  Netherlands Environmental Assessment Agency (PBL)[xi]—using data from British Petroleum (BP), the U.S. Geological Survey (USGS), and the latest version of the Emission Database for Global Atmospheric Research—global carbon dioxide emissions were constant in 2009. (See chart below.) The developed world’s recession brought about reduced fossil fuel consumption, but China and India together offset those reductions.[xii] China increased its coal consumption by 9.6 percent in 2009, and India increased coal consumption by 6.8 percent.[xiii]

According to PBL calculations, emissions from fossil fuel combustion in the industrialized countries (including those from gas flares, the burning of waste gas from oil drilling, and other industrial processes, such as the production of cement and ammonia) decreased by 7 percent owing to an attempted compliance with the Kyoto Protocol by countries that have ratified it and to the global recession. In China, despite a doubling of wind and solar energy for the fifth year in a row, carbon dioxide emissions increased by 9 percent, and in India, they increased by 6 percent.[xiv] Owing to the United Nations’ Clean Development Mechanism (CDM), the developed countries have been funding wind and solar projects in underdeveloped countries as a form of compliance with the Kyoto Protocol.[xv] China has benefited from the CDM to the point that 30 percent of its wind units are still not connected to its electrical grid.[xvi]

China’s Goals for Emission Reductions

China has set targets to reduce energy consumption per unit of economic output by 20 percent this year compared with 2005, and to reduce emissions of greenhouse gases per unit of economic output by 40 to 45 percent in 2020 from its 2005 levels.  However, it is finding it difficult to meet these targets owing to its expanding economy and its population’s desires for Western conveniences (e.g., bigger cars, more appliances).   As a result, apartment and office buildings are being constructed at a rapid pace; sales of large household appliances (such as refrigerators and washing machines) have more than doubled in the past year in rural China alone, owing to government subsidies to help peasants afford modern conveniences; and Chinese malls, which are exempt from temperature regulations, are being built throughout Chinese cities. To provide the electricity needed, last year, China built new coal-fired power plants with a total capacity greater than all the power plants in New York State.[xvii]

Further, China’s auto sales increased by 48 percent last year, surpassing U.S. auto sales for the first time, and they continue to increase.  With its economy shifting away from light industries for export (e.g., toys and clothing) and toward energy intensive industries such as steel and cement to satisfy domestic demand for goods, China has seen its efficiency gains reverse, having declined by 3.2 percent in the first quarter of this year. China uses twice as much energy per dollar of output as the United States and three times as much as the European Union. Further, manufacturing, which is energy intensive, makes up three times as much of the Chinese economy as it does the U.S. economy.[xviii]

With huge demand increases in electricity generation and steel mills, Chinese coal imports are expected to reach a record in 2010. According to Peabody Coal, China imported 70 million metric tons of coal during the first 6 months of this year, double the amount it imported through June of last year.[xix] China uses coal in its industrial processes in addition to its electricity production. In 2007, for example, China produced  50 percent of the world’s cement, more than 13 times as much as the United States.[xx]

Conclusion

As a result of its economic growth—expected to be 10 percent this year—and its citizens’ demand for Western conveniences, China’s energy requirements are increasing and it is becoming less energy efficient, contrary to its stated goals. Because most of its energy is produced from coal, China’s carbon dioxide emissions are increasing at a rapid pace. In fact, China’s carbon dioxide emissions have shown the largest six-month increase ever by a single country.[xxi] With double-digit economic growth, plus growing consumer demand and manufacturing capabilities, China is focused on supplying energy to feed its economic growth and to meet the needs of its population.  As Faith Birol, head of the IEA said when announcing China’s new status as the world’s number one energy consumer, China’s ascendancy marks “the start of a new age in the history of energy.”

[ii] Energy Information Administration, Monthly Energy Review, http://www.eia.doe.gov/emeu/mer/pdf/pages/sec2_3.pdf

[iii] Energy Information Administration, http://tonto.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm?tid=44&pid=44&aid=2&cid=&syid=1999&eyid=2004&unit=QBTU

[iv] According to the BP Statistical Review that includes oil, natural gas, coal, nuclear, and hydroelectric power in its primary energy statistics, China was still slightly behind the U.S. in energy consumption with the U.S. consuming 2,182 million metric tons of oil equivalent, and China consuming 2,177 million metric tons of oil equivalent.  See http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2010_downloads/statistical_review_of_world_energy_full_report_2010.pdf

[v] “US manufacturing crown slips”, Financial Times, June 20, 2010  http://www.ft.com/cms/s/0/af2219cc-7c86-11df-8b74-00144feabdc0.html

vi The Wall Street Journal, China Passes US as the World’s Biggest Energy Consumer IEA, July  19, 2010, http://online.wsj.com/article/SB10001424052748703720504575376712353150310.html?hat_input=China+Passes+U.S.+as+World%27s+Biggest+Energy+Consumer

[vii] “China overtakes US as world’s biggest car market” The Guardian, January 8, 2010. http://www.guardian.co.uk/business/2010/jan/08/china-us-car-sales-overtakes

[viii] Platt’s Report: China’s Oil Demand in June Hits New High, Up 10% from Year Ago, July 21, 2010, http://www.prnewswire.com/news-releases/platts-report-chinas-oil-demand-in-june-hits-new-high-up-10-from-year-ago-98919164.html

[ix] Energy Information Administration, International Energy Outlook 2010, http://www.eia.doe.gov/oiaf/ieo/pdf/ieoecg.pdf

[x] Ibid., http://www.eia.doe.gov/oiaf/ieo/pdf/ieorefcase.pdf

[xi] “No growth in total global CO2 emissions in 2009″, Netherlands Environmental Assessment Agency, July 1, 2010, http://www.rivm.nl/bibliotheek/rapporten/500212001.pdf.

[xii] Financial Times, China and India, the CO2 culprits of 2009, July 5, 2010, http://blogs.ft.com/energy-source/2010/07/05/china-and-india-the-co2-culprits-of-2009/

[xiii] BP Statistical Review of World Energy, June 2010, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2010_downloads/statistical_review_of_world_energy_full_report_2010.pdf

[xiv] “No growth in total global CO2 emissions in 2009″, Netherlands Environmental Assessment Agency, July 1, 2010, http://www.rivm.nl/bibliotheek/rapporten/500212001.pdf.

[xv] Institute for Energy Research, http://www.instituteforenergyresearch.org/2010/03/24/kyotos-clean-development-mechanism-is-it-producing-results-for-whom/

[xvi] Wall Street Journal, China’s Wind Farms Come With a Catch: Coal Plants, September 28, 2009, http://online.wsj.com/article/SB125409730711245037.html

[xvii] New York Times, China Fears Consumer Impact on Global Warming, July 4, 2010, http://www.nytimes.com/2010/07/05/business/global/05warm.html?_r=1

[xviii] Ibid.

[xix] ClimateWire, Coal: Peabody’s 2Q earnings surge on China’s galloping energy demand, July 21, 2010, http://www.eenews.net/climatewire/2010/07/21/3/

[xx] U.S. Geological Survey,  http://minerals.usgs.gov/minerals/pubs/commodity/cement/mcs-2008-cemen.pdf

[xxi] New York Times, China’s Energy Use Threatens Goals on Warming, May 6, 2010, http://www.nytimes.com/2010/07/05/business/global/05warm.html?scp=3&sq=China’s%20Energy%20Use%20Threatens%20Goals%20on%20Warming&st=cse

EIA’s Short-Term Forecasts

Because of the global recession and the slow U.S. recovery, the EIA expects U.S. petroleum demand to increase by only 200,000 b/d in 2010 and by 170,000 b/d in 2011, an increase of approximately 1 percent in each year. Despite the moratorium, domestic production is still expected to increase in 2010, but by only about 70,000 b/d, one-fifth of the previous year’s increase. Because of the Energy Independence and Security Act of 2007 mandating biofuel production, ethanol is expected to increase by 150,000 b/d in 2010. Together, domestic oil production and ethanol production will thus be able to meet the increased demand levels for 2010.

In 2011, however, the story is expected to be different. Although onshore oil production is expected to increase from 2010 levels, it will not be enough to compensate for the losses caused by the Administration’s drilling moratorium. As a result, EIA is projecting a decline in oil production of 26,000 b/d.  That production decline will be offset somewhat, the agency’s expects, by ethanol production that will increase 30,000 b/d from 2010 levels. Nevertheless, because petroleum demand is expected to increase, imports must compensate. EIA projects those imports to be petroleum products, which will be 190,000 b/d higher than they were in 2010, helping to not only meet the demand increases in 2011, but also to offset a forecasted decline in crude oil imports of 11,000 b/d.

The decreased production impacts from the Gulf of Mexico that are forecast by EIA in its July Short-Term Energy Outlook are higher than they were in the June Outlook. EIA indicates that it will continue to refine the estimates as more information becomes available. And more information has become available. The moratorium has now extended to 3 rigs in the Pacific, off the coast of Santa Barbara. A prolonged moratorium in the Pacific would impact more than 100,000 barrels of oil a day, resulting in even more dependence on foreign oil. It is unclear why the U.S. Department of Interior extended the moratoria to the Pacific, inasmuch as operations there differ from those that caused the oil spill in the Gulf and drilling operations there have been performed for over 40 years without a spill.[iii]

EIA’s Long-Term Projections

According to EIA, 30 percent of total oil production in the United States in 2009 came from the offshore area of the Gulf of Mexico [iv] and more than 80 percent of Gulf production was from deep water.[v] EIA’s long-term projections expect total offshore production to reach 38 percent of domestic production by 2035, increasing by 1 million barrels per day between 2007 and 2035, an annual rate of increase of 2.3 percent. That increase includes drilling off the Atlantic and Pacific coasts, owing to the expiration of the moratoria on offshore drilling that was permitted by both Congress and the administration in 2008. Of course, that was before BP’s oil spill on April 20, 2010, and the 6-month drilling moratorium enacted by the Obama administration.

The result of the Obama administration’s moratorium on deepwater exploratory oil drilling and increased offshore drilling regulations was to shut down the operation of 33 deepwater rigs and stall permits in shallow water.  It took the Federal government until July 19^th to issue a permit to drill in shallow water.[vi] In the deepwater areas, things are even more grim. Because keeping rigs idle costs their owners $500,000 a day (in the lost opportunity costs of drilling elsewhere),  2 oil rigs have left the Gulf of Mexico for foreign countries where the rig owners feel the atmosphere is more conducive to offshore drilling; the owners of an additional rig are contemplating a move. More owners may make the move if the drilling moratorium goes past November.[vii] Rep. Pete Olson (R-TX), who called for lifting the moratorium, said: “Once the rigs relocate, it could be a minimum of five to 10 years before they return.”[viii] Others are not so pessimistic, however, because of a possible surplus of newly built rigs next year. Nonetheless, there is a great deal of uncertainty as to whether the EIA’s long-term oil production forecasts will come to fruition.

That uncertainty includes whether the Obama Administration will open the waters off the Atlantic and Pacific coasts to oil and natural gas exploration. While President Obama had previously been open to such a move, the actions that are required to open those areas to exploration have been delayed by his administration.[ix]

Long-Term Impacts

Of course, if shut-downs in the Gulf were to continue, whether because of a moratorium or because of economic conditions that made drilling in the Gulf a sub-par investment, the short-term impacts noted above would get magnified over time.  A complete shut-down of deepwater drilling would reduce U.S. oil production by more than 27 percent by 2035, and oil imports would be 19 percent higher.[x] Further, employment would be reduced by 175,000 jobs (direct and indirect) each year between now and 2035, and GDP would be reduced by $500 billion ($20 billion annually).[xi]

The above estimates were based on the reference case forecasts from EIA’s Annual Energy Outlook 2010[xii] and projected development expenditures for deep water development in the Gulf from a 2009 IHS Global Insight study. A more recent analysis by Wood Mackenzie substantiated the project cost assumptions, indicating that higher drilling costs, an estimated 25 percent increase in capital costs from increased regulations and taxes, and regulatory delays would make the deepwater fields of the Gulf of Mexico sub-economic, that is, unable to achieve a post-tax internal rate‐of‐return of 10 percent.

Conclusion

With the oil spill from BP’s Macondo well essentially contained and only some tar balls left, the question is still open as to whether the Obama administration will restore drilling in the Gulf and the Pacific and lift the moratoria or at least not extend them past November so that the nation can benefit from its domestic resources, instead of competing with China and other countries for additional foreign oil supplies. Also at issue is whether oil companies will be subjected to unreasonable rules that will make offshore oil production unprofitable. Congress[xiii] is currently working on legislation to improve safety and to help prevent future oil spills from occurring,[xiv] but that legislation may prove too onerous for the industry, subjecting the American public even more to the whims of foreign countries.

[ii] BP Statistical Review of World Energy, June 2010, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2010_downloads/statistical_review_of_world_energy_full_report_2010.pdf

[iii] New offshore drilling moratorium lays off dozens of local workers, July 29, 2010, http://www.vcreporter.com/cms/story/detail/new_offshore_drilling_moratorium_lays_off_dozens_of_local_workers/8107/

[iv] Energy Information Administration, Gulf of Mexico Fact Sheet, http://www.eia.gov/oog/special/gulf/gulf_fact_sheet.html

[v] Energy Information Administration, Annual Energy Outlook 2010, Table 113, http://www.eia.doe.gov/oiaf/aeo/aeoref_tab.html

[vi] Reuters, U.S. issues first shallow-water drilling permit, July 19, 2010, http://www.reuters.com/article/idUSTRE66I5DG20100719

[vii] The Wall Street Journal, Exodus of Rigs Hasn’t Happened, July 21, 2010, http://online.wsj.com/article/SB10001424052748704723604575379332167380458.html?KEYWORDS=Exodus+of+Rigs+Hasn%27t+Happened

[viii] Deep Water Oil Drilling Rigs Leaving the Gulf Region, July 29, 2010, http://yoursinglesourcefornews.com/deep-water-oil-drilling-rigs-leaving-the-gulf-region/1712/

[ix] The Guardian, Barack Obama orders six-month freeze on offshore drilling and expansion, May 28, 2010, http://www.guardian.co.uk/environment/2010/may/27/obama-strategy-offshore-oil-drilling

[x] Potential Impacts of Proposed Increases in Regulations & Taxes on Deepwater Drilling in the Gulf, http://www.scribd.com/doc/34950965/Potential-Impacts-of-Proposed-Increases-in-Regulations-Taxes-on-Deepwater-Drilling-in-the-Gulf

[xi] Ibid.

[xii] Energy Information Administration, Annual Energy Outlook 2010, http://www.eia.doe.gov/oiaf/aeo/index.html

[xiii] The U.S. House of Representatives passed its version of the “oil spill” legislation (H.R. 3534)  on Friday, July 30, 2010. See http://www.eenews.net/eed/

[xiv] Bloomberg Businessweek, Congress Moves to Restrict Drilling, Shelves CO2 Cap, July 28, 2010, http://www.businessweek.com/news/2010-07-28/congress-moves-to-restrict-drilling-shelves-co 2-cap.html

AEA recently commissioned a study that showed 12,000 jobs would be lost and $2.8 billion in economic activity with it, because of the Administration’s six-month moratorium in the Gulf.

The survey also found that Americans overwhelming oppose new regulations on the energy industry and, instead, support efforts to better enforce existing laws (16%-75%).

Read the full results from AEA’s survey here.

“A New Crisis in the Gulf: The Offshore Moratorium”
3 minutes, 14 seconds
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