Here are my choices for the top half of my Top 10 energy related stories of 2013. The rankings are mostly in no particular order, although for me there was one clear story at the top of the list.
1. Lac-Mégantic disaster
On July 6th, 2013, a train carrying crude oil from the North Dakota Bakken oil fields to the Irving Oil Refinery in Saint John, New Brunswick started to roll downhill after being parked for the night. The train picked up speed and ultimately derailed in the heart of Lac-Mégantic, Quebec. A wave of burning oil engulfed the town, leaving 47 men, women, and children dead. Businesses were destroyed, homes were lost, and a large chunk of the town was destroyed. The rail company involved — the Montreal, Maine and Atlantic (MMA) Railway – declared bankruptcy shortly after the disaster.
This story intersects many of the themes I cover. Growing oil production in certain areas has led to growing rail shipments, while pipeline projects race to catch up. I have written a great deal about this trend, as well as the relative safety of rail transport versus pipeline transport. But what makes this my top energy story of 2013 is the magnitude of human life lost. Any major loss of life that occurs during the procurement of energy is going to rank highly with me, but the fact that this involved nearly 50 innocent bystanders puts this story at the top of my list.
I have seen a few Top 10 Energy lists for the year at this point, but I have yet to see one with this story at the top of the list. I am pretty sure if this disaster had happened somewhere in New England, it would have gotten a lot more attention. But the fact that it happened in Canada, and further that it happened in Quebec, meant that we quickly turned our attention toward other things. But to put this tragedy into perspective, more lives were lost in this disaster than in any accident in the energy industry since the 1988 Piper Alpha disaster in the North Sea that killed 167 men. No other energy industry accident in the 25 years since Piper Alpha resulted in the loss of as many lives as were lost in Lac-Mégantic.
I also think the villain of this story is MMA CEO Edward Burkhardt. He immediately began to point the finger at others before he had sufficient information to do so. He first said someone had tampered with the train, and then blamed a fire crew that had responded to an earlier engine fire. He finally announced that the sole responsibility for the accident was that of Tom Harding, the engineer and only crew-member of the train (only because Burkhardt had previously cut staff), for improperly setting the handbrakes when he adjourned for the night to a nearby hotel.
Burkhardt waited 4 days to visit the site, and proved himself to be a poor leader during this time of crisis. As CEO, he should have accepted blame on behalf of the company, and he should have done everything in his power to help those who were affected. Instead, he blamed others, declared bankruptcy, and laid off most of MMA’s work force. (For more information, see John Baldoni’s article at Forbes describing Burkhardt’s actions following the incident).
2. US oil production continues to expand
After nearly 40 years of mostly declining oil production, US crude output began to climb in 2009. US crude oil production has now climbed from 5.1 million barrels per day (bpd) in early 2009 to 7.3 million bpd in the most recent quarter. Remarkably, the US has become the fastest growing oil producing region in the world, and the International Energy Agency (IEA) is projecting that the US will once again become the world’s largest oil producer by 2015.
The resurgence in US oil production is a result of the fracking revolution, which refers to the marriage of the decades-old techniques of hydraulic fracking to horizontal drilling. Production is being driven primarily by Texas and North Dakota. The Bakken Formation in the Williston Basin that lies underneath North Dakota has driven North Dakota oil production from under 150,000 bpd in 2008 to the current level of nearly 900,000 bpd. In 2012 North Dakota surpassed Alaska to become the country’s second largest oil producer.
Like the Bakken, the Eagle Ford in Texas is a tight oil formation rendered economical by high crude prices and the application of fracking and horizontal drilling. The Eagle Ford stretches across South Texas, and is projected to grow even faster than the Bakken. In the past five years Eagle Ford oil production has grown from essentially zero to 659,000 bpd for the first 10 months of 2013. Projections have production reaching beyond 1 million bpd by mid-2014.
Then there is the Permian Basin in Texas, with more potential than the Bakken and Eagle Ford combined. The Permian Basin has been producing oil since the 1920s, and has already produced more than 29 billion barrels of oil and 75 trillion cubic feet of natural gas. To put these numbers in perspective, US consumed 6.8 billion barrels of oil and 25 trillion cubic feet of natural gas in 2012.
More importantly, the Permian Basin is projected to still contain recoverable oil and natural gas resources exceeding what has already been produced. These projections dwarf the combined estimated reserves for the Bakken and Eagle Ford. The Permian Basin currently produces some 900,000 bpd of crude, about 12 percent of US oil production. Some analysts expect Permian production to more than double by 2018 to 2 million bpd — a level last reached during the 1970s.
A number of analysts believe that the US fracking revolution will soon fade, but in 2013 production actually accelerated. The increase in 2013 will likely end up as an unprecedented 1 million barrel per day (bpd) increase over 2012 levels, putting US oil production at the highest levels in more than 20 years.
3. The EPA Softens on Ethanol
In 1978 the United States Environmental Protection Agency (EPA) issued a gasohol waiver that set the maximum legal limit of ethanol in motor gasoline at 10 percent denatured anhydrous ethanol.
27 years later, the Energy Policy Act of 2005 created a Renewable Fuel Standard (RFS) requiring 7.5 billion gallons of renewable fuel — primarily corn ethanol — to be blended into the fuel supply by 2012. The Energy Independence and Security Act (EISA) of 2007 created a new Renewable Fuel Standard — the RFS2 — accelerating the renewable fuel adoption schedule. Instead of the RFS requirement of 7.5 billion gallons by 2012, the RFS2 required 9 billion gallons by 2008, soaring to 36 billion gallons by 2022.
But the structure of the RFS2 set up some future problems. If gasoline blenders failed to comply with the mandated volumes (based on the volume of gasoline they sell in the US) they were required to buy credits called Renewable Identification Numbers (RINs) to make up the shortfall. But Americans are burning less gasoline than we used to, so meeting the EPA’s ethanol mandate would require a higher ethanol content than the current allowable maximum of 10 percent in regular unleaded.
This created a so-called “blend wall” that forces refiners to blend amounts of ethanol that would only be possible if the 10 percent limit were exceeded. After expanding the required volumes every year since the RFS was initially implemented, in 2013 the EPA indicated “that it will propose to use flexibilities in the RFS statute to reduce both the advanced biofuel and total renewable volumes in the forthcoming 2014 RFS volume requirement proposal.” Finally, in November the EPA proposed to reduce the 2014 requirement to 15.21 billion gallons of ethanol in the nation’s fuel supply, down from 16.55 billion gallons for 2013. The ethanol industry, long accustomed to getting what they want from the federal government, declared the action illegal and threatened to sue.
The EPA also recognized that too little cellulosic ethanol is being produced to meet that renewables sub-category’s special mandated volume, and it slashed the mandated cellulosic blending volume from 14 million gallons to 6 million gallons. (The original RFS2 called for a whopping 1 billion gallons of cellulosic ethanol to be blended into the fuel supply in 2013, but this amount had been reduced previously). The EPA further extended the compliance date for the total 2013 ethanol mandate of 13.8 billion gallons by four months, to June 30, 2014.
The US Court of Appeals for the District of Columbia also struck down the EPA’s cellulosic ethanol mandate, saying it was based on “wishful thinking.”
4. Mexico reforms their oil industry
Following nearly 10 years of declining oil production, the Mexican government voted to change three articles of the nation’s constitution, which would allow foreign investment and production-sharing agreements in Mexico. Mexico’s oil industry had been nationalized in 1938, and Mexican state oil company Pemex had been prohibited from entering into production-sharing agreements with foreign companies. As a result, some of the more expensive and challenging techniques for producing oil had not been adopted in Mexico. For example, despite having deep water oil reserves, PEMEX presently produces no oil from the deep water Gulf of Mexico due to the cost and risk of such projects.
Mexico’s Department of Energy estimates that foreign investment in oil and gas production will rise by 50 percent by 2018, to $10 billion, and optimistically projects that oil production will reverse the past decade’s decline, rising to 3 million barrels a day by 2018 and to 3.5 million by 2025.
5. The Keystone XL Pipeline decision drags on
In what has become an annual ritual, once more the Obama Administration failed to make a decision regarding the controversial Keystone XL Pipeline that would deliver oil from Canada’s Athabasca oil sands deposits to refineries in the US. The US State Department issued a largely positive review of the Keystone XL pipeline extension, while influential science journal Nature wrote that the Keystone XL pipeline’s environmental impact is exaggerated. Nevertheless, a high-profile campaign by environmentalists has paralyzed the Administration into inaction, even though President Obama himself “has privately expressed skepticism toward environmentalists’ claims about the pipeline.”
In the meantime, potential customers have started to lose interest as they are finding other ways of getting their oil to market. Harold Hamm, the CEO of Continental Resources Inc. (NYSE: CLR) had signed on to utilize Keystone XL when it was built, but Hamm recently stated that shipping crude by rail has been “a very effective way” of getting Continental’s oil to market, and that their interest in utilizing Keystone XL is waning as a result.
Canada has also responded with potential new routes of getting the oil sands to their east and west coasts. TransCanada’s Energy East pipeline would be a 4,500-kilometer pipeline that would carry 1.1-million barrels of crude oil per day from Alberta and Saskatchewan to refineries in Eastern Canada. To the west, Kinder Morgan Energy Partners LP (NYSE: KMP) has filed an application with Canadian regulators that would greatly increase the current capacity of the 300,000 bpd Trans Mountain pipeline, at present the only pipeline currently running from Alberta’s oil sands to Canada’s Pacific coast. The project would nearly triple the existing pipeline capacity to 890,000 bpd, and would terminate in Burnaby, British Columbia.
This will be my last column for 2013. In closing, I hope the year was a good one for readers, and that you will have much success and happiness in 2014.