Natural Gas

By Joseph Nyangon
Investment in R&D is crucial to achieving simultaneously the objectives of economic growth and sustainable development.

*A cross-country theme in the clean energy programs supported by the Obama budget proposal is the need for federal and private funding for research and development. Photo: Shutterstock*

President Obama has released a $4 trillion budget proposal for FY 2016. It contains a range of programs designed to encourage the deployment of next-generation clean energy and energy efficiency technologies. Here are the top five things to know about the budget in terms of clean energy and environmental investments:

1. Clean Power State Incentive Fund
The U.S. President proposes a $4 billion incentive fund to encourage states to make faster and deeper cuts in carbon emissions from electricity than would be required under the Clean Power Plan. The Environmental Protection Agency (EPA) is to administer the Clean Power State Incentive Fund, which would enable states to invest in activities that advance and complement the agency’s Clean Power Plan. The administration outlines several goals, including addressing impacts from the environmental pollution in low-income communities to supporting businesses to catalyze investment in renewable energy, energy efficiency and combined heat and power. The budget also includes $239 million to support reductions in greenhouse gas emissions programs at the EPA [1]. In particular, $25 million would be used to help states develop their Clean Power Plan strategies.

2. Permanent extension of renewable energy investment tax credits
The renewable energy Production Tax Credit (PTC) has been an important lifeline for the wind industry in the United States. It expired at the end of 2013 and Congress agreed to a one-year extension, which expired in 2014. Tom Kiernan, CEO of the American Wind Energy Association (AWEA), has called on Congress to extend the PTC, noting that “Investing in wind power makes sense and that the Production Tax Credit is the right policy to continue growing this abundant, homegrown resource.” [2] The FY 2016 budget proposal concurs, proposing a long-term and stable clean energy policy based on a permanent extension of solar and wind investment tax incentives, and reforming the incentives to make them simpler and more efficient. A separate incentive scheme for solar, the Investment Tax Credit (ITC), which authorized a 30% tax credit through 2016 before falling to 10% thereafter is set to expire at the end of 2018. The administration has proposed a permanent extension.

3. Increased investment in clean energy technologies and R&D
The administration has proposed an investment of $7.4 billion in pollution-cutting technologies—an increase of nearly 7% [3] from the $6.5 billion allocations in the FY 2015 [4], for clean energy programs and sustainable technologies. These investments in solar, wind, low-carbon fossil fuels and energy-efficiency initiatives primarily cover programs at the departments of Energy, Defense, Agriculture, and the National Science Foundation. Examples of the programs outlined in the budget include investment in electric vehicles to enhance their affordability and convenience; improvement in building efficiency programs; climate-proofing electric power grid such as storm hardening, flood-proofing, installing higher temperature-rated transformers and replacing underground transformers with saltwater submersible types; carbon capture and storage; and investment in research and development (R&D) to measure and mitigate fugitive methane emissions from natural gas systems.

4. Advancing international climate negotiations efforts and investing in the Green Climate Fund
The budget also provides $1.29 billion to advance the goals of the Global Climate Change Initiative and the President’s Climate Action Plan (which supports bilateral and multilateral engagement with major and emerging economies). This includes $500 million for U.S. contributions to the U.N.’s Green Climate Fund (GCF) to help catalyze additional private sector support for international climate action and $230 million for the Climate Investment Fund. So far, the GCF has received pledges totaling $10.2 billion from countries such as Japan, South Korea, Norway, Mexico, Sweden, United Kingdom, Indonesia, Mongolia, and more. [5]

5. Energy and climate resilience
The budget contains a panoply of provisions designed to help vulnerable parts of the country enhance their energy and climate resilience and preparedness, including increased investments in community and ecosystem resilience, and a better understanding of the projected impacts of climate change. For example, allocation of $400 million for National Flood Insurance Program Risk Mapping efforts, an increase of $184 million over FY 2015 funding levels. Additional funding has been proposed to tackle coastal resilience, wildfires, and drought resilience. These include $50 million towards the NOAA Regional Coastal Resilience Grants, $89 million to promote water conservation efforts, and $200 million to FEMA primarily for mitigation planning and facilities hardening, an increase of $175 million over current funding levels.

A cross-country theme in the clean energy programs supported by the Obama budget proposal is the need for federal and private funding for R&D [6]. The United States enjoyed remarkable success recently because of pharmaceutical and biomedical research (even if proponents of the free-market often less understand it). From securitizing energy efficiency retrofits to unlocking capital in private equity and pension funds to harnessing green bonds, investment in R&D to fund projects targeting climate resilience and low-carbon technologies is crucial to achieving simultaneously the objectives of economic growth and sustainable development. It is why analyzing the trend in federal budgetary allocation for clean energy investment is vital for understanding signals of long-term economic transformation. In every dimension of clean energy economic growth, there is a critical technological need, which must be underpinned by increasing capital flow in basic scientific research.

Notes
[1] Nyangon, J. (2015). Impacts of shale boom in the U.S. and beyond. FREE. https://freefutures.org/impacts-of-shale-boom-in-the-u-s-and-beyond/
[2] The state of the wind industry is strong: https://thehill.com/blogs/congress-blog/energy-environment/230248-the-state-of-the-wind-industry-is-strong
[3] Obama 2016 budget urges states to cut emissions faster: https://www.reuters.com/article/2015/02/02/us-usa-budget-energy-idUSKBN0L60AF20150202
[4] Budget of the United States Government, Fiscal Year 2015: https://www.whitehouse.gov/sites/default/files/omb/budget/fy2015/assets/budget.pdf
[5] Green Climate Fund Initial Resource Mobilisation: https://news.gcfund.org/wp-content/uploads/2015/02/pledges_GCF_dec14.pdf
[6] Nyangon, J. (2015). Why the U.S. urgently needs to invest in a modern energy system. FREE. https://freefutures.org/why-the-u-s-urgently-needs-to-invest-in-modernizing-its-energy-infrastructure/

By Joseph Nyangon

*EIA estimates the growth in natural gas in the U.S. will increase by an average of 1.6% annually between 2012 and 2040. Photo: Reuters.*

The unconventional oil and gas boom has shaken up energy markets in the U.S. and beyond. Across many American states, the energy sector is experiencing a number of changes far larger than in its history including improvements in policies, business models, technologies, and investment options to make energy cleaner, more plentiful and diversified, cheaper to store and capable of handling increased demand more intelligently. Technological advances have significantly enhanced production of oil and gas from shale, turning the U.S. into a major oil producer, with most of the new production coming from unconventional sources.

The U.S. Bureau of Labor Statistics estimates a drop in the producer price index for natural gas of nearly 57% between 2007 and 2012 because of increased supply from unconventional oil and gas sources. [1] Unlike other countries with abundant shale resource potential in Europe, Asia and Latin America, the U.S. enjoys some big advantages, such as solid financial foundation for risky projects, open access, a well-developed supply chain built upon many years of serving communities and rewarding shareholders. This is allowing sufficiently robust domestic supplies to meet even significant growth in demand across major sectors of the economy for example transportation, electric power generation, and manufacturing. The U.S. Energy Information Administration (EIA) estimates the growth in natural gas in the U.S. will increase by an average of 1.6% annually between 2012 and 2040. [2] This is more than double EIA’s projected 0.8% annual growth rate in consumption over the same period.

Yet the long-term trend in shale boom is clear. The projection by EIA points to a continuing supply growth for oil and gas out of the shale regions in the U.S., with composition of shale energy expected to reach 56% of total production by 2040. [3]

new production — *Source: U.S. Energy Information Administration [4]*

Because of the big shifts in production now underway, the industry is continuing to attract more domestic and foreign private investment, which is introducing strong competition in a sector that only a decade ago was deemed obsolete and high cost. A declining trend in U.S. power generation emissions attributed to fuel switching from coal-fired power plants to natural gas systems provides conditions, economic and environmental, that enable electric utilities to improve their operations because shale can come online and offline more quickly. This enhances the capacities of utilities to implement demand-side management strategies more effectively.

Consider the following recent developments:

Since 2007, annual production of shale gas in the U.S. has increased by nearly 51% and technically recoverable reserves have grown five-fold, according to EIA. [5] In particular, increased drilling in the Marcellus Shale has stimulated economic growth in places like Pennsylvania, traditionally a coal-producing state. At the same time, hydraulic fracturing (“fracking”) and horizontal drilling have caused concerns about their impact on the environment.
The EIA predicts that liquefied natural gas (LNG), as a share of U.S. natural gas consumption will grow to 12.4% by 2030 from current levels of around 3%. As energy consumption in general has grown, so has the demand for natural gas. Investment in new LNG gasification terminals will continue to become attractive because of the rising shale boom, flexible contracting arrangements, and falling liquefaction and shipping costs making LNG shipments more responsive to natural gas prices.
Promising oil “plays” (i.e. a commercially exploited energy deposit) in the Niobrara in Northern Colorado and parts of Kansas, Nebraska and Wyoming have revived big local economic gains. Introduction of advanced technologies in oil and gas extraction has led to significant rise in production in the Barnett Shale in Texas since 2003. [6] Drilling has also expanded in other areas, such as the Haynesville and Fayetteville shale plays in Texas, Arkansas, and Louisiana.
For now, rising U.S. shale supply is exerting pressure on global energy markets, pushing oil and gas prices to record lows. The upside of the falling oil prices is that it provides the U.S. with a unique opportunity to reform its energy policy towards a path of low-carbon future our society so clearly needs. Globally, more effective management of supply and demand is required to catalyze further investments and competition in energy markets, especially in Asia, Europe, and parts of Africa.

So far, the expansion in production points to continued market stability and economic gains in the long term. Domestically, more U.S. output will likely shield the country from frequent price spikes and seasonal price volatility. In the short term, a shortage of skilled engineers, seismologists, geologists and other experts may hamper production though, forcing energy companies to increase specialized training in oil and gas operations.

Over the long-term, that expertise may be exported to other countries, providing positive balance of trade benefits to the U.S. Even so, the decision by OPEC not to cut back on its production quota in November 2014 in an attempt to prop up oil prices has exerted pressure on non-OPEC producers especially the U.S. and Canada to reduce their production. But this has not stopped oil-prices from tumbling to fresh lows (settling below $50 a barrel) and forcing Goldman Sachs and Société Générale to sharply reduce their oil-price forecasts. [7]

However, increased production may not keep oil and gas prices down in the long-term as a prolonged price slump could tighten profit margins forcing energy companies to cut or delay investment projects. Escalating conflicts of attrition among top oil-producing nations are also possible as countries scramble for new energy markets. The resultant price rout, if that happens, would weigh on other markets and sectors devaluing currencies exposed to oil exports as well as intensifying risks to oil-dedicated sovereign wealth funds.

Notes

[1] U.S. natural gas gross withdrawals, U.S. Energy Information Administration (EIA), (U.S. Department of Energy, Jan. 12, 2015), www.eia.gov/dnav/ng/hist/n9010us2m.htm.
[2] “Annual energy outlook 2014,” Figure MT-43. U.S. natural gas production, 1990-2040, EIA, May 2014, https://www.eia.gov/forecasts/aeo/MT_naturalgas.cfm.
[3] “Annual energy outlook 2014,” Figure MT-44. U.S. natural gas production, 1990-2040, EIA, https://www.eia.gov/forecasts/aeo/MT_naturalgas.cfm.
[4] Drilling Productivity Report, EIA, Jan. 22, 2015), https://www.eia.gov/petroleum/drilling/#tabs-summary-1
[5] EIA, 2008. EIA, U.S. Natural Gas Supply, Consumption, and Inventories. In STEO Table Browser. Retrieved from https://www.eia.gov/outlooks/steo/data/browser/#/?v=15&f=A&s=0&start=2007&end=2015&ctype=linechart&maptype=0&linechart=NGMPPUS.
[6] “Technology drives natural gas production growth from shale gas formations,” EIA, July 2011, https://www.eia.gov/todayinenergy/detail.cfm?id=2170.
[7] Friedman, Nicole, 2015. Oil Prices Fall to Fresh Lows. The Wall Street Journal. Accessed on January 12, 2013, Available at: https://www.wsj.com/articles/brent-crude-falls-below-50-in-asian-trading-1421039495?KEYWORDS=Goldman+Sachs+

Obama’s Budget Proposals for Clean Energy and Climate Investment

Impacts of Shale Boom in the U.S. and Beyond

Consider the following recent developments:

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