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Eye on the Market | October 22, 2012 J.P Morgan The most important energy developments of 2012: how countries are planning for Independence Day Some detail on the components of increased US energy independence: Net increase in domestic production: we have modeled an increase of 1.8 mm bpd. For context, the 2012 Energy Information Administration (EIA) outlook has a variety of crude oil production scenarios for 2025 ranging from no increase to an increase of 2.8 mm bpd (the “technically recoverable resource” case). Any production increase from current levels is expected to come from “tight oil”, extracted from formations such as Bakken and Eagle Ford, and the Permian Basin. While conventional crude production volumes in the Gulf may rise, these are expected by the EJA to offset declines elsewhere (Alaska). The EIA’s optimism is matched by a June 2012 paper from Leonardo Maugeri at Harvard’s Kennedy School, which projects a US crude oil increase of 2.6 mm bpd by 2020. An illustrative quote’: “The shale/tight oil boom in the United States is not a temporary bubble, but the most important revolution in the oil sector in decades. It will probably trigger worldwide emulation over the next decades that might bear surprising results - given the fact that most shale/tight oil resources in the world are still unknown and untapped.... Thanks to the technological revolution brought about by the combined use of horizontal drilling and hydraulic fracturing, the US is now exploiting its huge and virtually untouched shale and tight oil fields, whose production — although still in its infancy — is already skyrocketing in North Dakota and Texas.” Regarding the Bakken shale, Maugeri’s estimate of 300 billion barrels of oil in place are exceeded by larger mean estimates from USGS geochemist Leigh Price and Continental Resources. Reduced consumption due to higher CAFE standards and Corporate Average Fuel Economy standards the automobile replacement cycle: this is a topic that Miles per gallon, passenger cars generates a lot of debate and technical discussion about driving patterns, but this much is clear: CAFE standards and the ongoing replacement of older cars will improve the fuel efficiency of the future fleet. The Union for Concerned Scientists has estimated the benefit of CAFE at 3 million barrels of oil per day by 2030, while the Administration’s estimate is 2.2 million by 2025. The average 11-year age of US cars is at the highest level on record, up from 8.5 years in 1995. While some of this increase reflects cars with improved lifespans, it also reflects the impact of the recession and pent-up demand to replace older cars. Asa ” ove 4983 1988 1993 1998 2003 2008 2013 2018 2023 result, our estimate of 1.5 mm bpd in oil consumption savings seems reasonable in context. Source: National Highway Traffic Safety Administration. Impact of rising penetration of natural gas vehicles: The rationale for natural gas vehicles (NGV) stems from a price per million BTUs for oil that’s 5x higher than natural gas. The US NGV penetration rate is low, in part due to the chicken/egg problem of the lack of natural gas refueling stations, and a more limited driving range (natural gas tanks generally hold less energy than diesel tanks). But the economics of NGVs are becoming more compelling for taxis, vans and buses that are centrally fueled with limited ranges, and for trucks with established routes where refueling stations can be built every 300-400 miles. Such heavy-duty vehicles account for 17% of all petroleum usage in the US. An example: a heavy duty 18-wheeler might travel 60,000 miles per year and get 5 mpg (using 12,000 gallons of diesel fuel). Assuming a $1.5 difference between diesel and liquid natural gas prices, a trucking company could save ~ $18,000 in annual fuel costs. The conversion cost to LNG (liquid natural gas) of $70,000 would imply a 4-year payback period, which is short in the scheme of energy trade-offs. We assume a very modest NGV penetration rate of 3%, which translates into reduced oil consumption of 0.3 mm bpd. Oil imported for export purposes: in 2011, the US exported 0.5 mm bpd in refined petroleum products. As a result, part of the current crude oil import tab is simply for re-export, and is not part of the country’s domestic consumption requirement. * “The Unprecedented Upsurge of Oil Production Capacity and What It Means for the World”, Leonardo Maugeri, Belfer Center for Science and International Affairs, Harvard Kennedy School, June 2012. See sections 5-9 for a discussion of how shale and tight oil are gradually replacing conventional sources, how hydraulic fracking works, a detailed examination of the Bakken Shale, how EIA and USGS data are backward-looking and underestimate potential growth, the challenges for the US refining industry which has invested in the ability to process heavy-sour imports rather than light-sweet oil from shale, pipeline needs and a range of environmental issues. Maugeri was Senior Executive Vice President of Strategies and Development at ENI, and Executive Chairman of Polimeri Europa, ENI’s petrochemical branch. a HOUSE_OVERSIGHT_024196