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JETRO’s Nagao Analyzes U.S. &
World Energy Industry

• Masaki Nagao, Petroleum Section Director at the Japan External Trade Organization (JETRO) Chicago Center, presented an analysis of the current U.S. and global energy industry and offered mixed-bag predictions during the JETRO Energy Seminar held in Chicago on July 26.

• The seminar covered the current and future energy needs in the North American market, analysis of the energy-related infrastructure, the global and North American oil industry, and U.S. energy and environmental policy and regulations.

Energy Demand in North America

• The energy outlook for 2040 shows that more than 60% of the U.S. demand for primary energy (an energy form found in nature that has not been subjected to any conversion or transformation) will be for oil and gas, while that proportion is over 50% worldwide. In 2014, the rate of demand for primary energy to the GDP growth remained unchanged or showed a small decline in Europe and the U.S., where manufacturing occupies a smaller portion of their GDP than the rest of the world.

• The International Energy Agency (IEA) predicts the major oil producer in 2040 will be the Middle Eastern countries, with the Latin American nations coming in second. The existing Middle Eastern conventional crude oil will still be the main product in the world market but will be declining as the nonconventional petroleum products such as the tight oil from the U.S. and oil sands from Canada will be on the rise. The U.S. currently has a 40 billion barrel-worth proved oil reserves as of 2014, a 9% jump from 2013, as more shale oil reserves are being discovered.

• The long-term forecast of the U.S. energy consumption will depend on the future of President Obama’s Clean Power Plan policy, Nagao said, which is designed to tighten control over coal-burning power plants. If the plan is implemented, coal consumption is predicted to decline to the 10% level by 2040 from 16% in 2015; if not, it will be 14% by 2040. The natural gas and renewable energy consumption will increase proportionally if the plan is executed. It was also projected that the consumption of energy for transportation (such as motor gasoline, distillate fuel oil and jet fuel) will hit a peak in 2017 and then decline, down 1.3% from 2015 in the year 2040.

• The U.S. crude oil production is forecast to decline after it peaked at 9.6 million barrels a day in April 2015, and then rebound after it hits the bottom in 2017 due to the increase of shale oil production. While the U.S. currently imports about 8 million barrels of crude oil a day (approximately the same amount it produces), exports of many of its petroleum products (gasoline, LPG, propene, etc.) are on the rise. Specifically, LPG exports increased 46% in 2015 from the previous year due to the growing demand from China. Going forward, various factors such as the 2015 removal of the crude oil export ban, changes in domestic and overseas demand, construction and operation of overseas refineries will influence the course of the U.S. petroleum products export, Nagao said. The operating rate of the U.S. refineries (50% of which are located in the Gulf region) has been up, with the current rate of 93% or daily production of 18.31 million barrels as of July 2016. While shipment of products such as motor gasoline and fuel oil has been stable, Nagao pointed out that the inventory level is crawling up.

• ---Canada, whose crude oil export is on the rise, is seeing a decline in investment (from $81 billion in 2014 to $31 billion in 2016) due to the downturn of the global crude oil price. Its crude oil production is predicted to continue the upward move, however, and will continue to see a stable rate of export to the PADD2 area (Michigan, Illinois, Ohio, Kentucky, and Tennessee) through the existing pipelines. More than 50% of the crude oil required in this area is supplied by Canada. Exporting Canadian crude oil requires extensive networks of pipelines; if a pipeline network is completed to link Canada to the Pacific Coast region, Canadian oil could be exported to Japan.

• In Mexico, domestic production is unable to keep up with the increasing demand for fuel products and the import level is up, specifically shale gas from the U.S. Deep-water oil reserves are said to be highly promising, but due to a lack of extraction technology the country is seeking overseas investors.

Infrastructure

• Construction of Keystone XL, part of the key pipeline network plans in North America, has been stalled by President Obama’s veto, and Canadian oil sand is currently transported to the Gulf region via the other existing pipelines. The lawsuit regarding the pipeline construction is one of the unknown factors deciding the future of the energy industry, Nagao said.

• Transport of crude oil by rail jumped 10-fold between 2011 and 2014 as shale production rose, then plummeted in 2015 due to the crude oil price decline.

Oil Industry Overview

• Recent net profits of the major oil companies (Exxon Mobil, Chevron, Shell, and BP) have fallen into the red, with an exception of Exxon Mobil. They are all cutting their 2016 investment. The upstream sector (companies that search and extract crude oil) is also struggling, scaling down their 2016 investment. The service sector companies, such as Schlumberger, Halliburton and Baker Hughes are also having a hard time; Halliburton and Baker Hughes show all of their businesses in the red since 2015. They have implemented a workforce reduction of 10,000 – 40,000 since the last half of 2014.

• The downstream sector is the only bright spot, showing positive net profit, but the profit margin shrank in the first quarter of 2016.

Government Policy and Regulations

• The planning and execution of President Obama’s Clean Power Plan for CO2 emission control is up to each state, and some coal-producing states filed a lawsuit to stop the implementation of the plan. In February 2016, the U.S. Supreme Court granted a stay, halting implementation of the plan while the deliberation still continues. The plan will be suspended as long as the court deliberation continues, handing it over to the next president.

• The U.S. Department of Energy is reviewing the national emergency energy supply system in preparation for natural disasters, along with the Strategic Petroleum Reserve. While seeking a reasonable solution for the energy supply infrastructure issues, readjustment of the energy distribution network across the U.S. and to/from Canada and Mexico is being discussed, as well as the issues regarding the optimal reserve level.

• Many of the existing energy-related regulations may be subject to change under the new administration. For instance, the situations surrounding ethanol-blend gasoline, initially implemented in 2007 for energy security, have noticeably changed since then. While ethanol blend is promoted to boost the use of biofuel, the blend is accepted no more than 10% in general. Of the 150,000 gas stations across the U.S., 95% sell the 10% ethanol blend, while only 180 stations sell the 15% blend and 3,000 sell the 85% blend. The setting of the mandatory mixture rate has been delayed but the general trend is for lowering the level. Meanwhile, about 14.8 billion gallons of ethanol, more than the mandatory production level, was produced in the U.S. in 2015, accounting for about 58% of the world production. U.S. ethanol producers are eyeing China as their export destination, whose demand is growing.


Masaki Nagao, Petroleum Section Director at
JETRO Chicago Center