Shale Output Is Falling Faster Than Expected (Bloomberg)By Joe Carroll – Apr 15, 2015, 12:00:03 AM

Shale Output Is Falling Faster Than Expected

Shale drillers will see production drop sooner than expected under a U.S. government forecast, a momentum change that hints at an eventual price rally.

Just five months after Saudi Arabia put the market into a tailspin by refusing to cut supply despite a global glut, the shale oil industry will record its first monthly dip since U.S. officials began weighing output in 2013.

The projected production drop is small, just 1 percent. Yet investors took note, pushing oilfield stocks to the top five spots in the Standard & Poor’s 500 Index on Tuesday, led by rig operators Ensco Plc and Diamond Offshore Drilling Inc. The decline lags the idling of rigs because of a backlog of already-drilled wells that have gradually been coming online.

“OPEC’s plan is playing out and price is correcting the oversupply,” said Michael Scialla, an analyst at Stifel Nicolaus & Co. in Denver, in a telephone interview.

West Texas Intermediate crude, the U.S. benchmark, climbed 3 percent to $53.47 a barrel at 2:03 p.m. in New York, extending the rising streak to a fourth trading session.

Shale fields make up about half of total U.S. production, which will continue growing this year and next, rising to 10.3 million barrels a day in 2025, according to a new longterm forecast by the Energy Department Tuesday.

Crude lost almost 60 percent of its value since late June, making some shale fields unprofitable to develop and forcing companies to cut back exploration prospects. Oil explorers were forced to shut down more than half the rigs drilling for crude in the U.S. since the Saudi statement in November, and canceled expansion plans to conserve cash.

‘Hyperbolic Decline’

“The question on everyone’s mind was would we see it in the second or third quarter, and I’m not surprised it’s happening in the earlier part of that range,” said David Pitts, chief financial officer at Houston-based producer Carrizo Oil & Gas Inc.

Wells extracting oil from dense shale rock experience “hyperbolic decline rates,” Pitts said by telephone.

Comstock Resources Inc. halted all crude drilling at the start of the year and expects the oil production decline to begin in its third-and fourth-quarter results, said Gary Guyton, the Frisco, Texas-based company’s director of planning.

“Shale is a treadmill, so if you’re not drilling, you’re not producing,” Guyton said in a telephone interview. Overall, the production decline “might not be hugely significant but at least it won’t be growing.”

The flexibility to ramp operations up and down quickly makes shale fields especially attractive to oil companies coping with volatile fluctuations in world oil markets, said ConocoPhillips CEO Ryan Lance last week in an interview at Bloomberg headquarters in New York.

Resilience Matters

“We think we’re going into a world that’s going to be characterized by lower, gradually rising prices, but a lot of volatility,” Lance said. “When you have that volatility, what you want is the ability to be flexible and resilient and be able to flex your programs up and down.”

Shale producers such as EOG Resources Inc. have been predicting U.S. output would decline by the end of the year. In February, the Houston-based company said its own production would reach a nadir during the second and third quarters.

Lance said he expected U.S. output to fall in the second half of the year, helping prices to recover to as high as $80 a barrel in the next three years.

“There is a supply response happening. You don’t see it in the first half of the year because of the investments that we made over the last two years,” he said. “The reductions in capital that the industry has made are substantial. That’s going to start to materialize in the back half of this year.”

OPEC Role

Saudi Arabia, the dominant member of the Organization of Petroleum Exporting Countries, squelched efforts by some in the cartel to curb output in November, accelerating a fall in oil prices prompted by oversupplies. Saudi crude has been displaced from some U.S. markets as the flood of domestic shale oil offered refiners a cheaper alternative.

The five major U.S. shale oil regions will pump an average of 5.561 million barrels a day in May, down from this month’s estimated 5.618 million, the Energy Department said in a report released Monday.

The Niobrara formation northeast of Denver will lead the decline with a 3.3 percent drop, according to the Energy Department in Washington.

In the Niobrara formation, which lies beneath northeast Colorado and the edges of Kansas and Wyoming, the production fall-off will be sharper than in other regions because explorers were quicker to idle rigs, said Andrew Cosgrove, an analyst at Bloomberg Intelligence. Compared to other shale-oil areas, individual wells in the Niobrara don’t produce as much crude, reducing profitability, he said.

Hedge Help

The two biggest operators in the Niobrara — Anadarko Petroleum Corp. and Noble Energy Inc. — have been slowing activity and deferring work, according to Scialla, the Stifel Nicolaus analyst.

Only one of the primary producers in the formation — Denver-based PDC Energy Inc. — hasn’t slowed down, and that’s because they locked in cash flow prior to the oil market’s crash with financial instruments called hedges, Scialla said in a telephone interview.

“The Niobrara wells are cheaper and shallower than in the other shale plays but they’re not as prolific either,” he said. “They cost about half as much as a typical well in the Eagle Ford or the Bakken but they also only produce about half as much.”

Permian Rising

After the Niobrara, the Eagle Ford shale in Texas and the Bakken formation in North Dakota will register the next biggest month-over-month production declines in May, with 1.9 percent and 1.7 percent, respectively.

In the other two major U.S. shale oil regions — the Permian in Texas and the Utica in Ohio — output is expected to rise in May, the Energy Department said.

Explorers will be cautious about resuming their old pace of drilling out of fear that rising production would deflate prices again, Carrizo’s Pitts said.

“There would have to be a pretty significant bump up in prices for people to start picking up rigs again,” Pitts said.

More articles on Oil

Exxon Mobil Shows Why U.S. Oil Output Rises as Prices Plunge By Joe Carroll, Bloomberg Dec 18, 2014, 9:57:23 AM

Crude oil production from U.S. wells is poised to approach a 42-year record next year as drillers ignore the recent decline in price pointing them in the opposite direction.

U.S. energy producers plan to pump more crude in 2015 as declining equipment costs and enhanced drilling techniques more than offset the collapse in oil markets, said Troy Eckard, whose Eckard Global LLC owns stakes in more than 260 North Dakota shale wells.

Oil companies, while trimming 2015 budgets to cope with the lowest crude prices in five years, are also shifting their focus to their most-prolific, lowest-cost fields, which means extracting more oil with fewer drilling rigs, said Goldman Sachs Group Inc. Global giant Exxon Mobil Corp. (XOM ▲ 0.44% 89.41), the largest U.S. energy company, will increase oil production next year by the biggest margin since 2010. So far, the Organization of Petroleum Exporting Countries’ month-old bet that American drillers would be crushed by cratering prices has been a bust.

Oil Prices

“Companies that are already producing oil will continue to operate those wells because the cost of drilling them is already sunk into the ground,” said Timothy Rudderow, who manages $1.5 billion as chief investment officer at Mount Lucas Management Corp. in Newtown, Pennsylvania. “But I wouldn’t want to have to be making long-term production decisions with this kind of volatility.”

A U.S. crude bonanza that has handed consumers the cheapest gasoline since 2009 has left oil exporters like Russia and Venezuela flirting with economic chaos. The ruble sank as much as 19 percent on Dec. 16 to a record low of 80 per dollar before recovering to close at 68; Russian bond and equity markets also crumbled. In Venezuela, the oil rout is spurring concern the country is running out of dollars needed to pay debt and swaps traders are almost certain default is imminent.

Profitable Wells

U.S. oil production is set to reach 9.42 million barrels a day in May, which would be the highest monthly average since November 1972, according to the Energy Department’s statistical arm.

Output from shale formations, deep-water fields, the Alaskan wilderness and land-based wells in pockets of Oklahoma and Pennsylvania that have been trickling out crude for decades already have pushed demand for imported oil to the lowest since at least 1995, according to data compiled by Bloomberg.

Existing wells remain profitable even as benchmark crude futures hover near the $55-a-barrel mark because operating costs going forward are usually $25 or less, Tom Petrie, chairman of Petrie Partners Inc., said in a Dec. 15 interview on the Bloomberg Surveillance television program.

Shut Ins

That’s why prices that have tumbled 47 percent from this year’s peak on June 20 haven’t prompted any American oil producers to shut down wells, said Petrie, a U.S. Military Academy at West Point graduate who has advised Saudi Arabia, Alaska and the U.S. government on energy issues.

The average cost to operate an existing well in most parts of the U.S. “is about $20 a barrel,” Petrie said. “It might be $5 higher or it might be $5 lower, that’s the out-of-pocket costs that we’re talking about. Until you dip into that and start losing money on a cash basis day in, day out, you don’t think about shutting in” wells.

Benchmark U.S. crude futures rose 0.3 percent to $56.63 a barrel at 9:55 a.m. in New York Mercantile Exchange trading. The futures are still on track for their fourth straight weekly decline.

Once oil companies sink cash into drilling wells, lining them with steel pipes and concrete, blasting the surrounding rocks into rubble with hydraulic fracturing, and linking them to pipeline systems, they have no incentive to scale back production, said Andrew Cosgrove, an analyst at Bloomberg Intelligence in Princeton, New Jersey.

Sunk Costs

Those investments, which represent “sunk costs,” are no longer a drain on cash flow, Cosgrove said. Instead, they generate capital companies use to repay debt, fund additional drilling, pay out dividends and buy back shares, he said.

Exxon, the world’s biggest oil producer by market value, is expected to boost crude and natural gas output by 2.8 percent next year to the equivalent of 4.1 million barrels a day, based on the average of eight analyst estimates compiled by Bloomberg.

Solar and Wind Energy Start to Win on Price vs. Conventional Fuels NOVEMBER 23, 2014 AT 7:57 PM NYT > Business Day / By DIANE CARDWELL

For the solar and wind industries in the United States, it has been a long-held dream: to produce energy at a cost equal to conventional sources like coal and natural gas.

That day appears to be dawning.

The cost of providing electricity from wind and solar power plants has plummeted over the last five years, so much so that in some markets renewable generation is now cheaper than coal or natural gas.

Utility executives say the trend has accelerated this year, with several companies signing contracts, known as power purchase agreements, for solar or wind at prices below that of natural gas, especially in the Great Plains and Southwest, where wind and sunlight are abundant.

Those prices were made possible by generous subsidies that could soon diminish or expire, but recent analyses show that even without those subsidies, alternative energies can often compete with traditional sources.

In Texas, Austin Energy signed a deal this spring for 20 years of output from a solar farm at less than 5 cents a kilowatt-hour. In September, the Grand River Dam Authority in Oklahoma announced its approval of a new agreement to buy power from a new wind farm expected to be completed next year. Grand River estimated the deal would save its customers roughly $50 million from the project.

And, also in Oklahoma, American Electric Power ended up tripling the amount of wind power it had originally sought after seeing how low the bids came in last year.

“Wind was on sale — it was a Blue Light Special,” said Jay Godfrey, managing director of renewable energy for the company. He noted that Oklahoma, unlike many states, did not require utilities to buy power from renewable sources.

“We were doing it because it made sense for our ratepayers,” he said.

According to a study by the investment banking firm Lazard, the cost of utility-scale solar energy is as low as 5.6 cents a kilowatt-hour, and wind is as low as 1.4 cents. In comparison, natural gas comes at 6.1 cents a kilowatt-hour on the low end and coal at 6.6 cents. Without subsidies, the firm’s analysis shows, solar costs about 7.2 cents a kilowatt-hour at the low end, with wind at 3.7 cents.

“It is really quite notable, when compared to where we were just five years ago, to see the decline in the cost of these technologies,” said Jonathan Mir, a managing director at Lazard, which has been comparing the economics of power generation technologies since 2008.

Mr. Mir noted there were hidden costs that needed to be taken into account for both renewable energy and fossil fuels. Solar and wind farms, for example, produce power intermittently — when the sun is shining or the wind is blowing — and that requires utilities to have power available on call from other sources that can respond to fluctuations in demand. Alternately, conventional power sources produce pollution, like carbon emissions, which face increasing restrictions and costs.

But in a straight comparison of the costs of generating power, Mr. Mir said that the amount solar and wind developers needed to earn from each kilowatt-hour they sell from new projects was often “essentially competitive with what would otherwise be had from newly constructed conventional generation.”

Experts and executives caution that the low prices do not mean wind and solar farms can replace conventional power plants anytime soon.

“You can’t dispatch it when you want to,” said Khalil Shalabi, vice president for energy market operations and resource planning at Austin Energy, which is why the utility, like others, still sees value in combined-cycle gas plants, even though they may cost more. Nonetheless, he said, executives were surprised to see how far solar prices had fallen. “Renewables had two issues: One, they were too expensive, and they weren’t dispatchable. They’re not too expensive anymore.”

According to the Solar Energy Industries Association, the main trade group, the price of electricity sold to utilities under long-term contracts from large-scale solar projects has fallen by more than 70 percent since 2008, especially in the Southwest.

The average upfront price to install standard utility-scale projects dropped by more than a third since 2009, with higher levels of production.

The price drop extends to homeowners and small businesses as well; last year, the prices for residential and commercial projects fell by roughly 12 to 15 percent from the year before.

The wind industry largely tells the same story, with prices dropping by more than half in recent years. Emily Williams, manager of industry data and analytics at the American Wind Energy Association, a trade group, said that in 2013 utilities signed “a record number of power purchase agreements and what ended up being historically low prices.”

Especially in the interior region of the country, from North Dakota down to Texas, where wind energy is particularly robust, utilities were able to lock in long contracts at 2.1 cents a kilowatt-hour, on average, she said. That is down from prices closer to 5 cents five years ago.

“We’re finding that in certain regions with certain wind projects that these are competing or coming in below the cost of even existing generation sources,” she said.

Both industries have managed to bring down costs through a combination of new technologies and approaches to financing and operations. Still, the industries are not ready to give up on their government supports just yet.

Already, solar executives are looking to extend a 30 percent federal tax credit that is set to fall to 10 percent at the end of 2016. Wind professionals are seeking renewal of a production tax credit that Congress has allowed to lapse and then reinstated several times over the last few decades.

Senator Ron Wyden, the Oregon Democrat, who for now leads the Finance Committee, held a hearing in September over the issue, hoping to push a process to make the tax treatment of all energy forms more consistent.

“Congress has developed a familiar pattern of passing temporary extensions of those incentives, shaking hands and heading home,” he said at the hearing. “But short-term extensions cannot put renewables on the same footing as the other energy sources in America’s competitive marketplace.”

Where that effort will go now is anybody’s guess, though, with Republicans in control of both houses starting in January.

Assault on California Power Station Raises Alarm on Potential for Terrorism

April Sniper Attack Knocked Out Substation, Raises Concern for Country’s Power Grid

By REBECCA SMITH WSJ
February 5, 2014

SAN JOSE, Calif.—The attack began just before 1 a.m. on April 16 last year, when someone slipped into an underground vault not far from a busy freeway and cut telephone cables.

Within half an hour, snipers opened fire on a nearby electrical substation. Shooting for 19 minutes, they surgically knocked out 17 giant transformers that funnel power to Silicon Valley. A minute before a police car arrived, the shooters disappeared into the night.

A sniper attack in April that knocked out an electrical substation near San Jose, Calif., has raised fears that the country’s power grid is vulnerable to terrorism. WSJ’s Rebecca Smith has the details. Photo: Talia Herman for The Wall Street Journal
With over 160,000 miles of transmission lines, the U.S. power grid is designed to handle natural and man-made disasters, as well as fluctuations in demand. How does the system work? WSJ’s Jason Bellini has #TheShortAnswer.
To avoid a blackout, electric-grid officials rerouted power around the site and asked power plants in Silicon Valley to produce more electricity. But it took utility workers 27 days to make repairs and bring the substation back to life.

Nobody has been arrested or charged in the attack at PG&E Corp.’s PCG -1.29% Metcalf transmission substation. It is an incident of which few Americans are aware. But one former federal regulator is calling it a terrorist act that, if it were widely replicated across the country, could take down the U.S. electric grid and black out much of the country.

The attack was “the most significant incident of domestic terrorism involving the grid that has ever occurred” in the U.S., said Jon Wellinghoff, who was chairman of the Federal Energy Regulatory Commission at the time.

The Wall Street Journal assembled a chronology of the Metcalf attack from filings PG&E made to state and federal regulators; from other documents including a video released by the Santa Clara County Sheriff’s Department; and from interviews, including with Mr. Wellinghoff.

Related
Q&A: What You Need to Know About Attacks on the U.S. Power Grid

The 64-year-old Nevadan, who was appointed to FERC in 2006 by President George W. Bush and stepped down in November, said he gave closed-door, high-level briefings to federal agencies, Congress and the White House last year. As months have passed without arrests, he said, he has grown increasingly concerned that an even larger attack could be in the works. He said he was going public about the incident out of concern that national security is at risk and critical electric-grid sites aren’t adequately protected.

The Federal Bureau of Investigation doesn’t think a terrorist organization caused the Metcalf attack, said a spokesman for the FBI in San Francisco. Investigators are “continuing to sift through the evidence,” he said.

Some people in the utility industry share Mr. Wellinghoff’s concerns, including a former official at PG&E, Metcalf’s owner, who told an industry gathering in November he feared the incident could have been a dress rehearsal for a larger event.

“This wasn’t an incident where Billy-Bob and Joe decided, after a few brewskis, to come in and shoot up a substation,” Mark Johnson, retired vice president of transmission for PG&E, told the utility security conference, according to a video of his presentation. “This was an event that was well thought out, well planned and they targeted certain components.” When reached, Mr. Johnson declined to comment further.

A spokesman for PG&E said the company takes all incidents seriously but declined to discuss the Metcalf event in detail for fear of giving information to potential copycats. “We won’t speculate about the motives” of the attackers, added the spokesman, Brian Swanson. He said PG&E has increased security measures.

View Graphics

Utility executives and federal energy officials have long worried that the electric grid is vulnerable to sabotage. That is in part because the grid, which is really three systems serving different areas of the U.S., has failed when small problems such as trees hitting transmission lines created cascading blackouts. One in 2003 knocked out power to 50 million people in the Eastern U.S. and Canada for days.

Many of the system’s most important components sit out in the open, often in remote locations, protected by little more than cameras and chain-link fences.

Transmission substations are critical links in the grid. They make it possible for electricity to move long distances, and serve as hubs for intersecting power lines.

Within a substation, transformers raise the voltage of electricity so it can travel hundreds of miles on high-voltage lines, or reduce voltages when electricity approaches its destination. The Metcalf substation functions as an off-ramp from power lines for electricity heading to homes and businesses in Silicon Valley.

The country’s roughly 2,000 very large transformers are expensive to build, often costing millions of dollars each, and hard to replace. Each is custom made and weighs up to 500,000 pounds, and “I can only build 10 units a month,” said Dennis Blake, general manager of Pennsylvania Transformer in Pittsburgh, one of seven U.S. manufacturers. The utility industry keeps some spares on hand.

A 2009 Energy Department report said that “physical damage of certain system components (e.g. extra-high-voltage transformers) on a large scale…could result in prolonged outages, as procurement cycles for these components range from months to years.”

Mr. Wellinghoff said a FERC analysis found that if a surprisingly small number of U.S. substations were knocked out at once, that could destabilize the system enough to cause a blackout that could encompass most of the U.S.

Not everyone is so pessimistic. Gerry Cauley, chief executive of the North America Electric Reliability Corp., a standards-setting group that reports to FERC, said he thinks the grid is more resilient than Mr. Wellinghoff fears.

“I don’t want to downplay the scenario he describes,” Mr. Cauley said. “I’ll agree it’s possible from a technical assessment.” But he said that even if several substations went down, the vast majority of people would have their power back in a few hours.

The utility industry has been focused on Internet attacks, worrying that hackers could take down the grid by disabling communications and important pieces of equipment. Companies have reported 13 cyber incidents in the past three years, according to a Wall Street Journal analysis of emergency reports utilities file with the federal government. There have been no reports of major outages linked to these events, although companies have generally declined to provide details.

“A lot of people in the electric industry have been distracted by cybersecurity threats,” said Stephen Berberich, chief executive of the California Independent System Operator, which runs much of the high-voltage transmission system for the utilities. He said that physical attacks pose a “big, if not bigger” menace.

There were 274 significant instances of vandalism or deliberate damage in the three years, and more than 700 weather-related problems, according to the Journal’s analysis.

Until the Metcalf incident, attacks on U.S. utility equipment were mostly linked to metal thieves, disgruntled employees or bored hunters, who sometimes took potshots at small transformers on utility poles to see what happens. (Answer: a small explosion followed by an outage.)

Last year, an Arkansas man was charged with multiple attacks on the power grid, including setting fire to a switching station. He has pleaded not guilty and is undergoing a psychiatric evaluation, according to federal court records.

Overseas, terrorist organizations were linked to 2,500 attacks on transmission lines or towers and at least 500 on substations from 1996 to 2006, according to a January report from the Electric Power Research Institute, an industry-funded research group, which cited State Department data.

An attack on a PG&E substation near San Jose, Calif., in April knocked out 17 transformers like this one. Talia Herman for The Wall Street Journal
To some, the Metcalf incident has lifted the discussion of serious U.S. grid attacks beyond the theoretical. “The breadth and depth of the attack was unprecedented” in the U.S., said Rich Lordan, senior technical executive for the Electric Power Research Institute. The motivation, he said, “appears to be preparation for an act of war.”

The attack lasted slightly less than an hour, according to the chronology assembled by the Journal.

At 12:58 a.m., AT&T fiber-optic telecommunications cables were cut—in a way that made them hard to repair—in an underground vault near the substation, not far from U.S. Highway 101 just outside south San Jose. It would have taken more than one person to lift the metal vault cover, said people who visited the site.

Nine minutes later, some customers of Level 3 Communications, an Internet service provider, lost service. Cables in its vault near the Metcalf substation were also cut.

At 1:31 a.m., a surveillance camera pointed along a chain-link fence around the substation recorded a streak of light that investigators from the Santa Clara County Sheriff’s office think was a signal from a waved flashlight. It was followed by the muzzle flash of rifles and sparks from bullets hitting the fence.

The substation’s cameras weren’t aimed outside its perimeter, where the attackers were. They shooters appear to have aimed at the transformers’ oil-filled cooling systems. These began to bleed oil, but didn’t explode, as the transformers probably would have done if hit in other areas.

About six minutes after the shooting started, PG&E confirms, it got an alarm from motion sensors at the substation, possibly from bullets grazing the fence, which is shown on video.

Four minutes later, at 1:41 a.m., the sheriff’s department received a 911 call about gunfire, sent by an engineer at a nearby power plant that still had phone service.

Riddled with bullet holes, the transformers leaked 52,000 gallons of oil, then overheated. The first bank of them crashed at 1:45 a.m., at which time PG&E’s control center about 90 miles north received an equipment-failure alarm.

Five minutes later, another apparent flashlight signal, caught on film, marked the end of the attack. More than 100 shell casings of the sort ejected by AK-47s were later found at the site.

At 1:51 a.m., law-enforcement officers arrived, but found everything quiet. Unable to get past the locked fence and seeing nothing suspicious, they left.

A PG&E worker, awakened by the utility’s control center at 2:03 a.m., arrived at 3:15 a.m. to survey the damage.

Grid officials routed some power around the substation to keep the system stable and asked customers in Silicon Valley to conserve electricity.

In a news release, PG&E said the substation had been hit by vandals. It has since confirmed 17 transformers were knocked out.

Mr. Wellinghoff, then chairman of FERC, said that after he heard about the scope of the attack, he flew to California, bringing with him experts from the Joint Warfare Analysis Center in Dahlgren, Va. After walking the site with PG&E officials and FBI agents, Mr. Wellinghoff said, the military experts told him it looked like a professional job.

In addition to fingerprint-free shell casings, they pointed out small piles of rocks, which they said could have been left by an advance scout to tell the attackers where to get the best shots.

“They said it was a targeting package just like they would put together for an attack,” Mr. Wellinghoff said.

Mr. Wellinghoff, now a law partner at Stoel Rives LLP in San Francisco, said he arranged a series of meetings in the following weeks to let other federal agencies, including the Department of Homeland Security, know what happened and to enlist their help. He held a closed-door meeting with utility executives in San Francisco in June and has distributed lists of things utilities should do to strengthen their defenses.

A spokesman for Homeland Security said it is up to utilities to protect the grid. The department’s role in an emergency is to connect federal agencies and local police and facilitate information sharing, the spokesman said.

As word of the attack spread through the utility industry, some companies moved swiftly to review their security efforts. “We’re looking at things differently now,” said Michelle Campanella, an FBI veteran who is director of security for Consolidated Edison Inc. ED -0.04% in New York. For example, she said, Con Ed changed the angles of some of its 1,200 security cameras “so we don’t have any blind spots.”

Some of the legislators Mr. Wellinghoff briefed are calling for action. Rep. Henry Waxman (D., Calif.) mentioned the incident at a FERC oversight hearing in December, saying he was concerned that no one in government can order utilities to improve grid protections or to take charge in an emergency.

As for Mr. Wellinghoff, he said he has made something of a hobby of visiting big substations to look over defenses and see whether he is questioned by security details or local police. He said he typically finds easy access to fence lines that are often close to important equipment.

“What keeps me awake at night is a physical attack that could take down the grid,” he said. “This is a huge problem.”

—Tom McGinty contributed to this article.

Write to Rebecca Smith at rebecca.smith@wsj.com

Corrections & Amplifications
Federal experts who examined a California substation after an attack last April were attached to the Joint Warfare Analysis Center at Dahlgren, Va. An earlier version of this article misidentified the men’s command as the Surface Warfare Center in Dahlgren, and incorrectly said it trains Navy SEALs.

U.S. Risks National Blackout From Small-Scale Attack

Federal Analysis Says Sabotage of Nine Key Substations Is Sufficient for Broad Outage

By REBECCA SMITH WSJ
March 12, 2014 7:03 p.m. ET

The U.S. could suffer a coast-to-coast blackout if saboteurs knocked out just nine of the country’s 55,000 electric-transmission substations on a scorching summer day, according to a previously unreported federal analysis.

The study by the Federal Energy Regulatory Commission concluded that coordinated attacks in each of the nation’s three separate electric systems could cause the entire power network to collapse, people familiar with the research said.

The U.S. could suffer a coast-to-coast blackout if saboteurs knocked out nine of the country’s electric-transmission substations on a summer day, according to a previously unreported federal analysis. National War College Professor Dr. Richard Andres discusses.
A small number of the country’s substations play an outsize role in keeping power flowing across large regions. The FERC analysis indicates that knocking out nine of those key substations could plunge the country into darkness for weeks, if not months.

Related
With over 160,000 miles of transmission lines, the U.S. power grid is designed to handle natural and man-made disasters, as well as fluctuations in demand. How does the system work? WSJ’s Jason Bellini has #TheShortAnswer.

“This would be an event of unprecedented proportions,” said Ross Baldick, a professor of electrical engineering at the University of Texas at Austin.

No federal rules require utilities to protect vital substations except those at nuclear power plants. Regulators recently said they would consider imposing security standards.

FERC last year used software to model the electric system’s performance under the stress of losing important substations. The substations use large power transformers to boost the voltage of electricity so it can move long distances and then to reduce the voltage to a usable level as the electricity nears homes and businesses.

The agency’s so-called power-flow analysis found that different sets of nine big substations produced similar results. The Wall Street Journal isn’t publishing the list of 30 critical substations studied by FERC. The commission declined to discuss the analysis or to release its contents.

Some federal officials said the conclusions might overstate the grid’s vulnerability.

Electric systems are designed to be resilient and it would be difficult for attackers to disable many locations, said David Ortiz, an Energy Department deputy assistant secretary who was briefed on the FERC study. The agency’s findings nevertheless had value “as a way of starting a conversation on physical security,” he said.

The study’s results have been known for months by people at federal agencies, Congress and the White House, who were briefed by then-FERC Chairman Jon Wellinghoff and others at the commission. As reported by the Journal last month, Mr. Wellinghoff was concerned about a shooting attack on a California substation last April, which he said could be a dress rehearsal for additional assaults.

“There are probably less than 100 critical high voltage substations on our grid in this country that need to be protected from a physical attack,” he said by email this week. “It is neither a monumental task, nor is it an inordinate sum of money that would be required to do so.” Mr. Wellinghoff left FERC in November and is a partner at law firm Stoel Rives LLP in San Francisco.

FERC has given the industry until early June to propose new standards for the security of critical facilities, such as substations.

Executives at several big utilities declined to discuss the risks to substations but said they are increasing spending on security. Virginia-based Dominion Resources Inc., D -1.41% for example, said it planned to spend $300 million to $500 million within seven years to harden its facilities.

A memo prepared at FERC in late June for Mr. Wellinghoff before he briefed senior officials made several urgent points. “Destroy nine interconnection substations and a transformer manufacturer and the entire United States grid would be down for at least 18 months, probably longer,” said the memo, which was reviewed by the Journal. That lengthy outage is possible for several reasons, including that only a handful of U.S. factories build transformers.

The California attack “demonstrates that it does not require sophistication to do significant damage to the U.S. grid,” according to the memo, which was written by Leonard Tao, FERC’s director of external affairs. Mr. Tao said his function was to help Mr. Wellinghoff simplify his report on the analysis.

The memo reflected a belief by some people at the agency that an attack-related blackout could be extraordinarily long, in part because big transformers and other equipment are hard to replace. Also, each of the three regional electric systems—the West, the East and Texas—have limited interconnections, making it hard for them to help each other in an emergency.

Some experts said other simulations that are widely used in the electricity industry produced similar results as the FERC analysis.

“This study used a relatively simplified model, but other models come to the same conclusion,” said A.P. “Sakis” Meliopoulos, professor of electrical and computer engineering at the Georgia Institute of Technology in Atlanta. He estimated it would take “a slightly larger number” of substation attacks to cause a U.S.-wide blackout.

In its modeling, FERC studied what would happen if various combinations of substations were crippled in the three electrical systems that serve the contiguous U.S. The agency concluded the systems could go dark if as few as nine locations were knocked out: four in the East, three in the West and two in Texas, people with knowledge of the analysis said.

The actual number of locations that would have to be knocked out to spawn a massive blackout would vary depending on available generation resources, energy demand, which is highest on hot days, and other factors, experts said. Because it is difficult to build new transmission routes, existing big substations are becoming more crucial to handling electricity.

In last April’s attack at PG&E Corp.’s PCG -1.29% Metcalf substation, gunmen shot 17 large transformers over 19 minutes before fleeing in advance of police. The state grid operator was able to avoid any blackouts.

The Metcalf substation sits near a freeway outside San Jose, Calif. Some experts worry that substations farther from cities could face longer attacks because of their distance from police. Many sites aren’t staffed and are protected by little more than chain-link fences and cameras.

While the prospect of a nationwide blackout because of sabotage might seem remote, small equipment failures have led to widespread power outages. In September 2011, for example, a failed transmission line in Arizona set off a chain reaction that created an outage affecting millions of people in the state and Southern California.

Sabotage could wreak worse havoc, experts said.

“The power grid, built over many decades in a benign environment, now faces a range of threats it was never designed to survive,” said Paul Stockton, a former assistant secretary of defense and president of risk-assessment firm Cloud Peak Analytics. “That’s got to be the focus going forward.”

Write to Rebecca Smith at rebecca.smith@wsj.com

Grid Terror Attacks: U.S. Government Is Urged to Takes Steps for Protection

Groups Say Industry Response to Potential Threats Is Insufficient

July 6, 2014 2:53 p.m. ET

An attack on a PG&E substation near San Jose, Calif., in April knocked out 17 transformers like this one.Talia Herman for The Wall Street Journal

Two research groups urged the federal government to take action to protect the electric grid from physical attacks, rather than leave security decisions in the hands of the utility industry.

The Congressional Research Service recommended that Congress examine whether a national-level analysis of the grid’s vulnerabilities is needed or if individual power companies’ internal security assessments are sufficient.

Separately, a nonprofit research group said efforts proposed by utilities to harden the grid fall short because they don’t account for how one region might depend on others. The report from the Battelle Memorial Institute, which operates six of the U.S. Energy Department’s laboratories, said attacks could occur across more than one electric system, destabilizing large areas.

The Federal Energy Regulatory Commission is considering new safety regulations proposed by an industry-dominated electric power organization. FERC, which regulates the nation’s high-voltage transmission system, told the industry in March that it must act to fortify the grid, after a series of articles appeared in The Wall Street Journal detailing how susceptible the electric system is to attack.

The first article described an April 2013armed attack on a substation near San Jose, Calif., which threatened electricity supplies to Silicon Valley. Other articles pointed out that transformers are especially vulnerable to damage and that an analysis by federal experts said an attack on as few as nine critical substations could result in a nationwide blackout.

The Congressional Research Service, essentially a think tank for federal lawmakers, last month said there is widespread agreement among experts that high-voltage transformers—the most costly pieces of equipment in electrical substations—are “vulnerable to terrorist attack, and that such an attack potentially could have catastrophic consequences.”

Attacks could cause blackouts lasting weeks, or even months, because it is difficult to obtain replacement transformers, the report said. Utilities keep relatively few spare transformers on hand because they can cost millions of dollars apiece. Each transformer is custom-built for its location so units aren’t easily swapped. Transformers are also heavy, often weighing hundreds of tons, so are hard to move.

The rules proposed to FERC by the industry-controlled North American Electric Reliability Corp. would require utilities to assess their own vulnerabilities and draft security plans for substations. But the proposal doesn’t define the threats against which utility assets should be protected, nor do they require any specific defenses, such as ballistic shields for transformers. The rules would require third-party verification of assessments and security plans, although utilities would be allowed to perform that service for each other.

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With over 160,000 miles of transmission lines, the U.S. power grid is designed to handle natural and man-made disasters, as well as fluctuations in demand. How does the system work? WSJ’s Jason Bellini has #TheShortAnswer.

NERC has said that its proposal gives utilities flexibility to respond to differing situations.

Jason Black, who wrote the Battelle report, which was published in May, said a utility-by-utility assessment is a flawed approach.

It would be better to determine which U.S. facilities are critical by looking across many utilities’ systems, he said. A blackout in New York, for example, might require electricity to be rerouted from the Midwest, making some substations in that region critical to the Empire State. But an insular assessment by an Ohio utility might not identify the importance of certain locations to New York.

“Assessments to determine critical facilities would be more rigorous if undertaken at a regional level,” Mr. Black said.

Write to Rebecca Smith at rebecca.smith@wsj.com

 

Bloomberg: Fracking Boom Pushes U.S. Oil Output to 25-Year High

U.S. crude production rose to the highest level in a quarter-century as a shale drilling boom in states such as Texas and North Dakota cut the need for foreign oil and pushed the country closer to energy independence.
The U.S. pumped 8.075 million barrels a day in the week ended Dec. 6, a gain of 0.8 percent, or 64,000 barrels a day, the Energy Information Administration said today. It’s the most since October 1988.
“You can’t swing a cat without hitting a barrel of oil in North America,” said Stephen Schork, president of the Schork Group Inc., an energy consulting firm in Villanova, Pennsylvania. “It’s amazing how quickly things can change.”
U.S. oil output grew 18 percent in the past 12 months, the fastest pace on record, boosting fuel exports and reducing reliance on imports, according to the EIA. The boom will make the country the world’s largest producer by 2015, five years sooner than last year’s forecast, the International Energy Agency in Paris said last month.
Imported crude and petroleum products will dip to 28 percent of domestic demand next year, the lowest since 1985 and down from a peak of 60 percent in 2005, the EIA said yesterday in its Short-Term Energy Outlook. Refined product exports have advanced 16 percent so far this year, EIA data show.
West Texas Intermediate oil for January delivery dropped $1.07, or 1.1 percent, to settle at $97.44 a barrel on the New York Mercantile Exchange. WTI traded at a discount of $12.26 a barrel to Brent crude, the European benchmark.
Rising Output
Advances in horizontal drilling and hydraulic fracturing, or fracking, have boosted output from dense rock formations such as the Bakken shale in North Dakota and the Eagle Ford in Texas. The techniques allow producers to bore sideways through the richest layers, and then use explosives followed by a high-pressure stream of water, sand and chemicals to crack open the deposit and free the trapped oil and gas.
Production in Texas has increased 21 percent from the end of 2012 through September, EIA data show. North Dakota likewise rose 21 percent, Wyoming is up 14 percent and Oklahoma added 19 percent, Colorado gained 11 percent and New Mexico advanced 12 percent, EIA records show.
Domestic oil output will average 8.54 million barrels a day next year, according to the EIA, the statistical arm of the Energy Department.
The surge in supplies has led domestic producers such as Harold Hamm, the chairman and chief executive officer of Oklahoma City-based Continental Resources Inc., to push the U.S. to lift restrictions on U.S. oil exports, which were imposed by Congress following the 1973 Arab oil embargo. Crude sent to Canada, which is allowed under license, rose to 99,000 barrels a day in September, EIA data show.
Taking into account all energy sources, including natural gas, petroleum, nuclear and renewables, the U.S. met 86 percent of its needs in the first eight months of 2013, on pace to be the highest annual rate since 1986, EIA data show.
To contact the reporters on this story: Christine Harvey in New York at charvey32@bloomberg.net; Asjylyn Loder in New York at aloder@bloomberg.net
To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net
7 COMMENTS

Case For Exporting Marcellus Shale Gas

Q&A: Industry Economist Makes the Case for Exports

JUNE 18, 2013 | 3:26 PM
BY 

Liquefied natural gas (LNG) storage tanks and a membrane-type tanker are seen at Tokyo Electric Power Co.'s Futtsu Thermal Power Station in Futtsu, east of Tokyo February 20, 2013. Japan's imports of LNG hit a monthly record of 8.23 million tonnes in January, on an increased need for fuel to generate electricity after the nuclear sector was hit by the Fukushima crisis.

ISSEI KATO / REUTERS/LANDOV

Liquefied natural gas (LNG) storage tanks and a membrane-type tanker are seen at Tokyo Electric Power Co.’s Futtsu Thermal Power Station in Futtsu, east of Tokyo February 20, 2013. Japan’s imports of LNG hit a monthly record of 8.23 million tonnes in January, on an increased need for fuel to generate electricity after the nuclear sector was hit by the Fukushima crisis.

The nation’s new energy secretary Ernest Moniz spoke at an energy conference Monday, where he told the audience that applications for new natural gas export facilities would be decided upon by the end of the year. Gas producers want to sell their fuel overseas where it fetches a higher price. But before it gets shipped abroad, it has to be converted to its liquid form known as LNG – or liquefied natural gas. Building those facilities is expensive. The closest proposed LNG export terminal to the Marcellus Shale deposit is in Cove Point, Maryland. That could cost more than $3 billion dollars to convert from its former role as a natural gas import terminal. But domestic manufacturers and those who say U.S. security depends on keeping the fossil fuel stateside are pushing back. Environmentalists worry that exports will stimulate more production in states like Pennsylvania, where activists have been pushing to implement a drilling moratorium. StateImpact spoke to the chief economist of the American Petroleum Institute, John Felmy, about the future uses of natural gas, and the export issues.

A: Felmy: Well, Marcellus Shale could play a tremendous opportunity in terms of exports, because it’s such a vast deposit. Developing it can of course be used to supply other states, as we are doing now. But there is likely to be so much of it, that exporting it at a very good price would help in terms of keeping production going.

Q:  Phillips: Right now we have the price of natural gas at about $4 per million btu [British Thermal Units] here domestically. And what are we seeing oversees?

A: Felmy: Well in Europe, it’s about $12 per million BTU. But in Asia, it’s as much as $17 or $18 because of the challenges that Japan faces with the Fukushima plants.

Q: Phillips: And I know that the industry is getting a lot of push back from manufacturers who are concerned that if you start exporting natural gas the price for them is going to be too high. And what they have been saying the low price in natural gas has allowed them to come back to the US, and that they are seeing a manufacturing renaissance, because of natural gas prices being so low.

A: Felmy: I think there is enough to go around because all indications are, as the economists would say, is that the supply curve is really flat. In other words, when you have an increase in demand from exports you don’t kind of have a sharp increase in price. And if you look at the drilling data, you see that it tends to support that conclusion.

Q: Phillips: And why is that?

A: Felmy: It is because it is a huge resource, and the industry has been so creative at improving technology, such that we have gotten so much more gas from areas that we’ve never dreamed of. Where ten years ago we were talking about building all these LNG import terminals, and you had all these terminals built and so that was the consensus and everyone from Alan Greenspan on down.

Q: Phillips: The price of natural gas has gone up and down and up and down. And when you think about how much it costs to build an export facility, The Dominion proposal at Cove Point, Maryland is about $3.4 billion dollars, how do you manage that risk? It seems like a pretty risky thing.

A: Felmy: Lets let the market work. Lets not have government intervention. It’s the investors who are going to be taking the risk and things could change, but right now the U.S. is so far ahead of other countries, even though many other countries have huge deposits of shale gas, that we are going to have that opportunity for quite a while.

And so, if you look at the major competition internationally, right now it’s Australia and their costs have increased significantly. And if you look at the deposits in other areas like China, Argentina, and Russia they are large, but because of issues of rule of law, and ownership of the resource, because in most countries except for the United States, the government owns that gas. Here in the US private individuals can [own that gas]. Such factors are reasons why we are ahead and why we are likely to stay ahead.

Q: Phillips: So talk to me about the end user here, how feasible is it that we are going to be seeing cars run on natural gas?

A: Felmy: Well, only 3% of natural gas supply is being used in cars right now. It’s primarily fleets, busses, things like that. So you can expand the car fleet with natural gas, but it is very expensive.  So, it’s about $8,000 to convert car, at that level of expense the car will expire before you get your money back.

But for heavy duty trucks and fleets of cabs, that is a very viable option. We are also going to see a lot of growth in electric power generation. And because of emission restrictions we are already seeing a huge shift from coal to natural gas. We’re incidentally seeing a shift from nuclear to natural gas. For example, there’s a [nuclear] plant out in California, the San Onofre, they decided not to restart. Well, the only other alternative to supply that electricity is with natural gas.

Marcellus Shale Exports Could Transform Global LNG Market

Marcellus Shale Exports Could Transform Global LNG Market

JULY 25, 2013 | 10:14 AM
BY 

The offshore loading pier at Dominion has not received a ship importing liquefied natural gas since January 2011.

LINDSAY LAZARSKI / WHYY/NEWSWORKS

The offshore loading pier at Dominion has not received a ship importing liquefied natural gas since January 2011.

In energy-hungry countries, all eyes are on Pennsylvania’s Marcellus Shale gas. In a dramatic shift from just five years ago, the U.S. is looking to export, instead of import natural gas. And if more natural gas starts getting shipped abroad, Pennsylvania’s Marcellus Shale could help change the global market for natural gas, and lighting homes in Tokyo.

The U.S. currently has two export terminals, one in Sabine Pass, Louisiana, and the ConocoPhillips LNG export terminal in North Cook Inlet, Alaska. The U.S. Department of Energy just gave preliminary approval for ConocoPhillips to expand its Freeport, Texas import terminal to export liquefied natural gas. About 17 other export proposals now await approval by the DOE, including the Cove Point liquefied natural gas import terminal operated by Dominion Resources.

 

Lindsay Lazarski / WHYY/Newsworks permalink

The offshore loading platform (background) as seen from the Cove Point Lighthouse.

THE “SWEET SPOT” YIELDS A GLUT

In areas of northeast Pennsylvania, drillers say they’ve hit the “sweet spot.” In a drill rig several stories up above a Susquehanna County forest, gas workers guide a giant diamond drill bit, about the size of a basketball, as it cuts through the rock thousands of feet below. Steve MacDonald is in charge of this operation for Cabot Oil and Gas.

Cabot Oil and Gas public relations officer George Stark with a drill rig worker outside of the "dog house."

SUSAN PHILLIPS / STATEIMPACT PENNSYLVANIA

Cabot Oil and Gas public relations officer George Stark with a drill rig worker outside of the “dog house.”

“This is what we call our dog house, this is the command center of our operations up here,” says MacDonald. “This is our driller Mr. Reed here. He shows you how fast we’re drilling, how fast we’re pumping so he understands what’s going on downhole.”

Downhole in places like this Cabot Oil and Gas well, the company has struck gold, so to speak. Cabot’s natural gasproduction volumes and profits soared in 2012, exceeding all expectations.

And because of wells like these in Pennsylvania’s Marcellus Shale formation, a glut of natural gas has developed nationwide.  Domestic prices for natural gas have dropped about one-third, since July, 2008 before the shale boom really took off.

But overseas, prices are three or four times that.  So drillers here want to ship their gas abroad. The economist for the American Petroleum Institute, John Felmy says exporting Marcellus Shale gas makes sense.

“Because it’s such a vast deposit,” says Felmy, “and developing it, of course, can be used to supply other states as we’re doing now. But there’s likely to be so much of it that exporting it at a very good price would help in terms of keeping production going.”

API’s John Felmy talks to StateImpact Pennsylvania about exports.

As the price has dropped, production in some of Pennsylvania’s gas fields has tailed off.

PIPELINES LEAD TO IDLED IMPORT TERMINAL

In what some call a stroke of luck, the wells across Pennsylvania could easily be connected to an existing interstate pipeline system, which links up to a nearby import terminal.

One of seven holding tanks at Dominion's Cove Point Liquefied Natural Gas Terminal.

LINDSAY LAZARSKI / WHYY/NEWSWORKS

One of seven holding tanks at Dominion’s Cove Point Liquefied Natural Gas Terminal.

That import facility lies about 320 miles south of Susquehanna County, on a spit of land jutting out into the Chesapeake Bay, where large white cylindrical tanks are surrounded by a network of 32-inch pipes. The Cove Point liquefaction plant is operated by Dominion Resources. And Dominion also owns and operates a pipeline system that connects these tanks to Pennsylvania’s gas fields. It was only a couple of years ago when plans for that system were to use it for storage and transport between different markets on the East Coast. Today, the company wants to reverse the flow, transporting shale gas to their export facility in Lusby, Md.

The onshore liquefaction plant sits surrounded by a nature preserve. To get to the offshore dock, visitors have to head down into a tunnel and use a bicycle to travel beneath the water to the pier that lies out in the middle of the Chesapeake Bay.

Before any natural gas gets shipped overseas, it has to be cooled to minus-260 degrees Fahrenheit, the point where it becomes liquid. Export plants that liquefy the gas cost billions of dollars to build. So what they want to do at Cove Point’s idled import facility is spend the relatively bargain basement price of $4 billion converting it to an export facility.

The last time a ship docked at this pier was on New Years Day of 2011. Since then, the seagulls have moved in and made it home.  Hideaways beneath large pipes hold nests with chirping chicks. A nearby dump provides scraps of food, which the nesting birds bring back safely to this deserted pier, leaving the white-washed dock littered with chicken bones and bird poop.

Liquefied natural gas technician Ernest Ortiz monitors the process from the offshore control center.  Ortiz says he would love to start seeing ships coming to the dock. The last one to unload LNG was on New Years Day, 2011.

LINDSAY LAZARSKI / WHYY/NEWSWORKS

Liquefied natural gas technician Ernest Ortiz monitors the process from the offshore control center. Ortiz says he would love to start seeing ships coming to the dock. The last one to unload LNG was on New Years Day, 2011.

Dominion Resources spokesman Dan Donovan says this facility would make one of the best places in the U.S. to export natural gas.

“We have a world class dock and pier,” says Donovan. “We have the storage, we have a pipeline into what is now the second largest natural gas field in the world.”

Donovan’s point about the pipelines is key.

The company’s plan for their pipeline system used to be to pump imported natural gas to states like New York, New Jersey and Ohio. But their plans have changed almost overnight.

“No one saw this coming,” says Donovan.

FUKUSHIMA AND THE SHALE GAS REVERSAL

And Dominion wasn’t the only industry player surprised by Marcellus Shale production.

Wolfgang Moehler is the director of global LNG, the shorthand for liquefied natural gas, for the firm IHS Global.

“[The years] 2007, 2008, the assumption was that the U.S. would become, in the next ten years, the largest gas importers in the world,” says Moehler.

But today, that assumption has been turned on its head, thanks in part to all those productive Marcellus Shale wells, and the March, 2011 nuclear disaster in Japan.

Japan’s energy situation changed dramatically back in March 2011. Before the meltdown at the Fukushima Daiichi plant, nuclear energy supplied a third of Japan’s needs. Where it once had 50 nuclear reactors, today the country is down to just two.

Photo taken from a Kyodo News helicopter over the town of Okuma, Fukushima Prefecture, shows the Fukushima Daiichi Nuclear Power Station on July 9, 2013. Tokyo Electric Power Co., the operator of the crippled plant, said the same day that the density of radioactive cesium in groundwater by the sea at the plant has soared to around 90 times higher than three days ago.

KYODO/LANDOV

Photo taken from a Kyodo News helicopter over the town of Okuma, Fukushima Prefecture, shows the Fukushima Daiichi Nuclear Power Station on Tuesday, July 9, 2013, more than two years after the meltdown. Tokyo Electric Power Co., the operator of the crippled plant, said the same day that the density of radioactive cesium in groundwater by the sea at the plant has soared to around 90 times higher than three days previous.

Analyst Wolfgang Moehler is watching a dramatic shift in the global LNG market, partly due to increasing energy needs in developing countries like India, and the loss of nuclear energy in Japan.

“So a significant amount of that electricity production had to be substituted from fossil fuel generation,” says Moehler.

Japan was already the world’s largest importer of natural gas, but since Fukushima, the pace has increased steadily. Moehler says Japan would love to snag some of that cheaper American gas coming from Pennsylvania’s gas fields. And Pennsylvania’s gas producers would love to sell at a higher price.

He explains that importing nations like Japan are locked into long-term natural gas contracts tied to the price of oil.

“The emergence of the U.S. now as a potential exporter opened up a competition,” said Moehler. [Energy companies in countries like Japan] could also go back to their traditional producers and say well we have a different opportunity, we have to renegotiate the price. So Fukushima has a very very strong impact on Japan’s decision making in that regard.”

SHIFTING GLOBAL LNG MARKETS

Photo shows the inside of the world's largest liquefied natural gas tank in Yokohama near Tokyo, unveiled by Tokyo Gas Co. on March 13, 2013.

KYODO/LANDOV

Photo shows the inside of the world’s largest liquefied natural gas tank in Yokohama near Tokyo, unveiled by Tokyo Gas Co. on March 13, 2013. Japan’s imports of LNG hit a monthly record of 8.23 million tons in January.

But Dominion Resources still has a number of hoops to jump through before it starts piping in Marcellus gas, liquefying it, and shipping it out. IHS analyst Wolfgang Moehler says despite current contracts with neighboring countries like Australia and Indonesia, it may still be cheaper for Japanese energy companies to pay for the Cove Point conversion, and the extra transportation costs of shipping LNG through the Panama Canal to the Pacific rim. This is how good a deal Marcellus Shale gas seems to companies in Japan. Sumitomo Corporation, a Japanese trading company and its U.S. affiliate Pacific Summit Energy, has agreed to help foot the almost $4 billion bill to convert Cove Point to a natural gas export terminal. That company, along with the U.S. affiliate of India’s GAIL Ltd., have signed 20-year service agreements with Dominion to provide natural gas. Sumitomo has since announced that the exported gas would be sold to Tokyo Gas and Kansai Electric Power.

First, the U.S. Department of Energy has to approve any deals with non-free-trade countries, and determine if they’re in the public good. Dominion’s Dan Donovan says they’re pretty confident their proposal will gain approval from the DOE. The Federal Energy Regulatory Commission also has to weigh in. The state of Maryland has to issue about 30 different permits.

LNG EXPORT OPPONENTS

And not everyone is thrilled with LNG exports. American manufacturers don’t like the plan, because cheap natural gas has helped domestic factories become more cost-efficient.  They say exports would raise prices at home.

Listen to StateImpact’s interview with George Biltz of Dow Chemical.

On the environmental front the Sierra Club is challenging the Cove Point plan in court.

Sierra Club attorney Craig Segall says regulators should not turn a blind eye toward the impact of increased production in natural gas fields like Pennsylvania.

Cove Point Lighthouse sits within sight of the Cove Point LNG terminal.

LINDSAY LAZARSKI / WHYY/NEWSWORKS

Cove Point Lighthouse sits within sight of the Cove Point LNG terminal.

“So if that continues, you wind up making these really large national energy policy decisions,” says Segall, “not just here [in Cove Point] but cumulatively across all these terminals and never ask this serious question. This implies x percent increased methane emissions, y percent increased wastewater production, and as a result, increased wastewater capacity in the fracking states.”

Segall wants the federal government to study the larger upstream impacts.

Natural gas exports may be a good deal for drillers, their investors, and  landowners who leased their mineral rights. But Segall thinks more thought should be given to Pennsylvanians who get few of the benefits of drilling but most of the burdens.

So what would Segall say to someone living in Tokyo, facing rising energy costs?

“I think that’s absolutely the hardest question,” he told StateImpact.

Segall says renewables should be pursued. But in the meantime, he has no easy answer.

“But there’s always this question of equity,” he says. “There’s a question about how do we provide energy globally. And there’s the question about who suffers where energy is produced and who wins, upstream in Pennsylvania or anywhere along the supply chain.”

Segall also says the increased tanker traffic in the Chesapeake Bay could upset its already threatened ecosystem.

Dominion Resources says converting the Cove Point plant will create thousands of new jobs in Maryland and upstream in Pennsylvania.

The company expects the Department of Energy to make a decision on its application by the end of the year.

Oil-by-rail feeding East Coast Refineries Displacing Imported Crude

Oil-by-rail feeding PADD 1

Published: Sept. 19, 2013 at 7:27 AM

WASHINGTON, Sept. 19 (UPI) –WASHINGTON, Sept. 19 (UPI) — The increase in the amount of oil reaching refineries on the eastern U.S. coast is likely coming from rail deliveries, the U.S. energy department said.

Most of the crude oil reaching refineries in the Petroleum Administration for Defense District 1, which represents the East Coast market, is typically imported.

The Energy Information Administration, the Energy Department’s analytical division, said crude oil volumes at PADD 1 refineries increased steadily during spring and summer 2013. At the same time, there’s been a decline in net crude oil imports because of higher domestic production.

EIA said there’s a growing supply of crude oil delivered to PADD 1 that can’t be accounted for by production, imports or other forms of transport.

“Crude oil delivered via rail to East Coast refineries is likely contributing to the increase in unaccounted-for crude oil supply above historical levels,” the administration said in a report published Wednesday.

EIA in its short-term market report, published last week, said U.S. crude oil production in August averaged 7.6 million barrels per day, the highest monthly level since 1989.

The Association of American Railroads said last week petroleum and petroleum products were totaled 11,950 carloads, representing approximately 8.3 million barrels, for the week ending Sept. 7. That’s a 4.8 percent increase from the same time last year.

© 2013 United Press International, Inc. All Rights Reserved.

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