1. 1 What Happened? Why are We Talking about Exports? Natural Gas, Refined Products, and Crude Oil Pittsburgh Energy Law and Policy Institute August 2, 2013 Geoffrey Norman Brand PhD Senior Economic Advisor American Petroleum Institute brandg@api.org

2. Natural Gas and Crude Oil Hydraulic Fracturing and Horizontal Drilling Refined Products Refinery Throughput / Utilization and Consumption Conservation 1220 L Street, NW Washington, DC 20005-4070 www.api.org2 2008 Everybody was Thinking Imports Why the Sudden Shift?

3. Exploration – Old Fashion Way Look for Traps or Concentrations of Oil Still done Today 1220 L Street, NW Washington, DC 20005-4070 www.api.org3 Cap Rock Nonporous Nonpermeable Reservoir Porous and Permeable Source Rock Carbon Rich Good Stuff = 150 – 350 Million years old

4. Hydraulic Fracturing Straight to the Source More common to be combined with horizontal drilling. Is mostly a mechanical process of creating cracks in nonpermeable source rocks. Oil or natural gas is there – it needs stimulation to flow. Typically 1000’s of feet below usable aquifers. 1220 L Street, NW Washington, DC 20005-4070 www.api.org4 Source Rock (Shale) Aquifer Hydraulic fracturing in not new – it has been done for the last 60 years. We are just getting better at it therefore it is becoming more common.

5. 1220 L Street, NW Washington, DC 20005-4070 www.api.org5 Shale Resources in the U.S. Both Natural Gas and Oil

6. Natural Gas 1220 L Street, NW Washington, DC 20005-4070 www.api.org6

7. 7 In 2005 – 55 Proposed LNG Import Terminals (43 in the U.S.)

8. 1220 L Street, NW Washington, DC 20005-4070 www.api.org8 Historical U.S. Natural Gas Production Peaked in 1973 Rising since 2006 Today U.S. is the #1 natural gas producer in the world Demand was projected to grow – Production was flat since 1990

9. Domestic production of shale gas has grown dramatically over the past few years Adam Sieminski, WAMM, April 18, 20139 shale gas production (dry) billion cubic feet per day Sources: LCI Energy Insight gross withdrawal estimates as of March 2013 and converted to dry production estimates with EIA-calculated average gross-to-dry shrinkage factors by state and/or shale play. It all started in Texas

10. Shale gas leads growth in total gas production through 2040 to reach half of U.S. output 10 U.S. dry natural gas production trillion cubic feet Source: EIA, Annual Energy Outlook 2013 Associated with oil Coalbed methane Tight gas Shale gas Alaska Non-associated onshore Non-associated offshore ProjectionsHistory 2011 Adam Sieminski, WAMM, April 18, 2013 Everything is optimistic?

11. 1220 L Street, NW Washington, DC 20005-4070 www.api.org11 Jan 2010 to Jan 2012 Production Post 2012 Flat? Hurricanes If you are wondering US Production +10 Bcf / day +18%

12. 1220 L Street, NW Washington, DC 20005-4070 www.api.org12 Average Annual Natural Gas Prices Henry Hub, Louisiana 2005 to 2008 $7 to $9 After Recession No Price Recovery Remember -- production grew +10 Bcf /day until early 2012

13. 1220 L Street, NW Washington, DC 20005-4070 www.api.org13 U.S. Development has shifted to Liquids Baker Hughes Rig Counts - Oil vs. Natural Gas U.S. stopped drilling for natural gas at least significantly slowed Waiting for markets – the resource is there. Most natural gas wells drilled today also have liquids (ethane, butane and propane).

14. 1220 L Street, NW Washington, DC 20005-4070 www.api.org14 In 2013 – 26 Proposed LNG Export Terminals (23 in the U.S.)

15. The U.S. projected to be a net exporter of natural gas around 2020 15 U.S. dry gas trillion cubic feet Source: EIA, Annual Energy Outlook 2013 ProjectionsHistory 2011 Consumption Domestic supply Net imports Adam Sieminski, WAMM, April 18, 2013 World demand limitations. International competition from 60 to 70 projects US permitting delays increase the likelihood of other non-US projects going forward Industry estimates for U.S. LNG exports are usually around 4 to 6 Bcf/day.

16. Benefits of LNG Exports (Study by 2013 ICF International) 4 to 16 Bcf /day of LNG Exports Results Employment +75,000 to 450,000 GDP +$15 billion to $75 billion Moderate Impacts on natural gas prices - $0.30 to $1.00 Economic gains driven by Increased oil and gas development Increased chemical production Increased manufacturing output Increased Income in the economy http://www.api.org/news-and-media/news/newsitems/2013/may-2013/approve-remaining-us-lng-export-permits-without-delay

17. Crude Oil 1220 L Street, NW Washington, DC 20005-4070 www.api.org17

18. 1220 L Street, NW Washington, DC 20005-4070 www.api.org18 Source: EIA U.S. Crude Oil Production has increased 2010 to 2013 +2 million barrels per day +40% Peaked in 1970

19. 1220 L Street, NW Washington, DC 20005-4070 www.api.org19 Source: EIA TX OK TX, OK, KS ND CA CO TX, LA TX U.S. tight oil production has more than tripled in two years

20. Recent Forecasts are being revised upwards Source: EIA, Annual Energy Outlook 2013 and Short-Term Energy Outlook, April 2013 million barrels per day ProjectionsHistory 2011 Alaska Tight oil Other lower 48 states onshore Lower 48 states offshore STEO April 2013 U.S. crude oil projection ProjectionsHistory 2011 Alaska Tight oil Other lower 48 states onshore Lower 48 states offshore Reference caseHigh resource case

21. Even under aggressive production assumptions the U.S. is projected to be a net importer oil for the foreseeable future. U.S. liquid fuel supply million barrels per day Source: EIA, Annual Energy Outlook 2013 and Short-Term Energy Outlook, April 2013 Consumption Domestic supply Net imports 37% ProjectionsHistory Petroleum Exports -8% 40% 2012 Current restrictions to export crude oil except to Canada. But why do we care about crude oil exports?

22. Adam Sieminski, WAMM, April 18, 201322 Crude oils are NOT the same. Crude varies in weight and sulfur content. Each refinery

23. Increased crude oil production – more markets for any type of crude Reduced infrastructure constraints (pipelines, rail, barge) – You could go to a port or a refinery. Reduced need for refinery upgrades Better refinery utilization Lowers per unit costs 1220 L Street, NW Washington, DC 20005-4070 www.api.org23 Potential Impacts of Removing Crude Oil Export Restrictions Note: There is a good chance that there may be approaching limits of sweet light crude refinery capacity in the Gulf region

24. 1220 L Street, NW Washington, DC 20005-4070 www.api.org24 Won’t restricting crude oil exports increase crude supply in the U.S. and result in lower gasoline prices to consumers? Crude prices are set on world markets Restricting crude exports may reduce the price of some types of crude in some areas of the country: However - gasoline prices are set by the highest marginal priced gallon – not the average and will likely not lower prices to consumers.

25. 1220 L Street, NW Washington, DC 20005-4070 www.api.org25 Eagle Ford – South Texas Satellite Photo of activity 225 Rigs operating

26. Refined Products 1220 L Street, NW Washington, DC 20005-4070 www.api.org26

27. Refinery Throughput has recently increased. + 1 million barrels per day 2009 to 2012 Refineries use domestic and foreign inputs.

28. Liquid Petroleum consumptions has recently decreased. 2007 to 2012 Minus 2 million barrels per day Includes Gasoline, Jet Fuel, Kerosene, Distillate, Fuel oil

29. U.S. petroleum product exports exceeded imports in 2011 for first time in over six decades Adam Sieminski, WAMM, April 18, 201329 annual U.S. net imports of total petroleum products, 1949 – 2012 million barrels per day Source: EIA, Petroleum Supply Monthly and Annual Energy Review net product exporter exports imports net imports Other reasons to export – We like gasoline – Europe likes diesel.

30. 1220 L Street, NW Washington, DC 20005-4070 www.api.org30 Export Take-aways Natural Gas – The U.S. can produce more than it consumes Crude Oil – It is better to export the type of crude oil refineries don’t want and import the type it does. Refined Products – It is best to keep our refineries at full capacity and export any product we do not need. Exports have positive impacts on the U.S. economy in terms of GDP, employment, and balance of trade.

31. 1220 L Street, NW Washington, DC 20005-4070 www.api.org31 Thank - You