Hurricanes underscore importance of GoM
Ronald Bowser, Angela Boice, Richie Baud Minerals Management Service
The United States is one of the world’s largest producers of oil and natural gas - a fact sometimes overshadowed by the nation’s consumption of 21 MMbbl of oil and 60 bcf of natural gas per day. The Gulf of Mexico is the foundation of the nation’s energy supply, delivering more oil and gas to US consumers than almost any other single source in the world. Hurricanes Katrina and Rita dealt a severe blow to GoM infrastructure, but operators have persevered and continue to explore and develop in the deepest waters and to greater vertical well depths.
In addition to being one of the nation’s most important providers of oil and natural gas, Gulf producers are also world leaders when it comes to preventing waste during production. While producers in some countries flare or vent most of the gas extracted with their oil, GoM operators conserve nearly all of this gas and bring it to market. This is of environmental interest because flaring and venting of natural gas emits greenhouse gases (carbon dioxide and methane) into the atmosphere. Gulf producers, therefore, provide Americans with a reliable source of energy while avoiding waste and minimizing the environmental impact.
Oil production
There are many countries around the globe contributing large quantities of oil to satisfy the world’s growing energy needs. None brings more to the market than Saudi Arabia, which produced over 10.1 MMbo/d in 2004. It often goes unnoticed that the US produces 8.8 MMBo/d - almost as much oil as the Saudis. Russia is right behind the US with production of 8.5 MMbo/d.
These three countries - Saudi Arabia, the US, and Russia - account for over 34% of the world’s daily production, and no other countries come close to matching their oil output. The fourth-highest producer, Iran, for example, produces 3.8 MMbo/d. This is less than half of the output of the third highest oil producer - Russia.
Even with such a large production capacity, the US must import 68% of its crude oil and lease condensate. However, only 56% of the US liquid petroleum supply comes from imports when domestic natural gas plant liquids, other hydrogen and hydrocarbons for refinery feedstocks, alcohol and other sources, and refinery gains are added.
These imports are spread over numerous countries, with no one country making up more than 11% of the US crude and lease condensate supply. Since the US is the world’s second-largest oil producer, it should come as no surprise that one of the largest single sources of this nation’s supply is the GoM. The Gulf represents 10% of the US crude oil and lease condensate supply - identical to Saudi Arabia’s 10% contribution and surpassed only by Canada and Mexico, each of which accounts for 11% of our supply. With GoM oil production still on the rise, this region is expected to remain the focal point of the US supply.
Natural gas production
The US is also one of the world’s largest producers of natural gas. While Russia leads the world with production of 60 bcf/d of natural gas, the US is a close second at 54 bcf/d. No other countries come close to the production volumes of these two, which together account for around 41% of the world’s natural gas production.
One significant difference between the US oil supply and gas supply is that the country imports 56% of its oil but only 14% of its gas; and most of that imported gas comes from neighboring Canada. Currently, the GoM accounts for 14% of the US natural gas supply - second only to Texas, which supplies 21%. Alaska and Canada are not far behind at 12% each. Aside from Canada, foreign countries only account for 2% of the US gas supply. This small import volume comes in the form of liquefied natural gas (LNG) brought to a handful of existing terminals in the US. Meanwhile, a significant number of companies are permitting, planning, and building LNG facilities in coastal areas around the country. There are about 30 LNG terminals (May 2006) including expansion projects currently under review or already approved by the Federal Energy Regulatory Commission (FERC) and the US Coast Guard. If all of these facilities were constructed, it would enable the US to import an additional 40 bcf/d of gas. For comparison, the current US supply is about 79 bcf/d and current LNG imports are only 2 bcf/d. However, it is likely that only a fraction of these proposed facilities will ever be constructed. If we assume that about one-fourth of these facilities will be built over the next several years the added capacity would make LNG about 15% of the US supply.
According to US Secretary of Energy, Samuel Bodman, “We are in the midst of a monumental economic transition from isolated markets scattered around the globe to a worldwide natural gas market.” This transition will give American consumers access to natural gas reserves around the world. While this will increase the US dependence on foreign natural gas, it is a limited dependence and one that is essential to meeting the nation’s energy needs. The growing worldwide gas market will also benefit many developing countries where natural gas is found in abundance, but the lack of local markets make it a waste product.
Conservation
As the US dependence on foreign natural gas begins to grow, it will be increasingly important to conserve these resources whenever possible. Fortunately, the US is already a world leader in this area. Many countries around the world place few restrictions on the amount of natural gas that is flared (burned) or vented (released into the atmosphere unburned) during production. Such flaring and venting is most common in remote areas where there is little or no existing pipeline infrastructure and the economics do not justify capture of the gas.
Federal GoM operators flare and vent a small percentage (0.26%) of natural gas production (Note that data on gas flared and vented outside the US is very limited. Some countries do not report the information or they report suspect numbers. We maintain that production of oil or natural gas is not possible without some flaring or venting. Therefore, countries that do not report any flaring or venting have been excluded from our analysis). Producers in other parts of the US are right behind those in the Gulf, flaring or venting only 0.56% of produced natural gas.
The excellent conservation record in the GoM results from two basic factors. First, there is vast pipeline infrastructure already in place, which is tied into the US market, where there is strong demand for natural gas. Therefore, economic considerations usually persuade companies not to flare or vent natural gas unless it is absolutely necessary. Second, government regulations strictly limit the amount of flaring and venting allowed in federal waters. In those rare cases where market forces alone do not prevent waste, regulators step in to make sure that flaring and venting are kept to a minimum.
Other countries that report flare and vent volumes to be a very small percentage of their total gas production includes Saudi Arabia, Norway, Canada, and the United Kingdom. The countries with the best conservation records are often those which have strictly enforced government regulations limiting these emissions.
Several countries around the world allow companies to flare or vent over half of the natural gas they produce. Nearly all of the gas produced in Cameroon and Nigeria, for example, is flared or vented. Cameroon does not produce a lot of oil and gas, so the volume of gas flared and vented is relatively small despite the high percentage. Nigeria, however, produces a significant amount of hydrocarbons. The Nigerian government has recognized this loss of their natural resources and is taking steps to have the gas captured and brought to market.
Import dependence
US production accounts for 11% of the world’s oil production and 20% of the world’s gas production. America’s demand for energy, of course, is such that we use all of these hydrocarbons plus import a large amount of oil and a moderate amount of natural gas. The world’s need for energy continues to increase and natural gas is the fastest-growing source of conventional energy. As the demand for natural gas increases and the hurdles to transport it are overcome, the worldwide market for natural gas will expand. LNG is likely to be an integral part of this global market. In addition, natural gas that is currently being flared in developing nations will become a valuable commodity once it can be economically captured and transported to countries like the US where the demand is high. This will ease the strain on US production capabilities but increase the nation’s dependence on foreign natural gas.
Hurricanes Katrina and Rita highlighted the importance of Gulf production to the US economy and emphasized the fact that domestic production is the backbone of the nation’s energy supply. With the majority of its infrastructure restored, the GoM is once again a major component of the US energy portfolio and will prove to be prolific for many years to come.