by Andy O’Brien
Last week representatives from the oil and gas industry gathered in Portland for a forum on the economics, technology and infrastructure of Maine’s petroleum market sponsored by the Maine Energy Marketers Association and the Environmental and Energy Technology Council of Maine (E2 Tech).
"In Maine we have a diverse mix of energy sources – biomass, hydro, wind, solar and now tidal – but petroleum in its various liquid and gaseous forms dominates the market," said Patrick Coughlin, principal of the environmental consulting engineering firm St. Germain Collins.
Maine is currently the least densely populated state east of the Mississippi River, with over 95 percent of the passenger movement by road. With 68 percent of all homes heated with oil (the national average being just 6 percent), Maine is particularly vulnerable to the volatility of oil markets. According to Robert Moore, CEO of Dead River Company, those price fluctuations are due to a number of factors including instability in the Middle East, profit seeking by OPEC and national oil producers, government regulation, increased demand coupled with domestic supply restrictions, and unregulated speculation in the futures markets. As Moore noted, the futures market, which came into being during the 1980s, helped independent distributors like Dead River buy fuel in the summer and hedge those prices. However, due to excessive speculation in recent years, Moore said that the average gallon of home heating oil has been bought and sold over 20 times before it arrives at a customer’s home.
"These are all circumstances in which local oil dealers have absolutely no control," said Moore.
Getting It Here –
"The very end of the distribution chain"
According to Tom Flaherty, vice president of sales for Sprague Energy, historically the major oil companies controlled the entire infrastructure for refined petroleum – from drilling and refining to distribution – but have started divesting and selling off their assets. As a result, two-thirds of refined petroleum distribution capacity in Maine is controlled by independent operators like Sprague Energy, one of the largest independent oil and energy distribution companies in the Northeast, with over 9 million barrels of refined product storage. Sprague operates 15 facilities throughout the Northeast, including locations in Portland and Searsport. In addition to refined products, the company also stores coal and petroleum coke for the cement industry, china clay for paper making, finish paper, road salt, and windmill blades that are delivered on ships to the Searsport and Portland facilities.
"We’re at the very end of the distribution chain for energy," said Flaherty. "Whether by sea, by land or road, we’re probably about as far as you can get from energy supplies. We don’t produce it here; we simply import it and consume it."
Flaherty said that most of the refined fuel Maine receives originates from Canada or New York Harbor, before it arrives in either of Maine’s two main ports, Portland and Searsport. Flaherty added that while Portland and Searsport are known as deepwater ports, with 36 feet of water, the ports have a relatively shallow draft compared to the deeper ports of New York Harbor and other points south. Some of the biggest ships need 60 feet of water, so the shallow draft limits the ability to get economies of scale in having fuel delivered. The fact that Maine has a very limited rail infrastructure adds to the challenges.
"When we talk about energy being a global business, it’s global in terms of how we price our product, but in terms of how we receive it, it’s pretty limited," said Flaherty. "As a consequence, our ability to really achieve supply-chain economies of scale in the state is really not that great."
According to Flaherty, changes in the price of gas, home heating oil, and other refined petroleum products will be influenced more by global supply-demand trends than regional infrastructure considerations.
U.S. Poised to Become World’s Number One Oil & Gas Producer & It’s Happening Because of Unconventional Development
Speaking on behalf of the Washington D.C.-based American Petroleum Institute, Kyle Isakower quoted the federal Energy Information Administration (EIA), which estimates that nationwide energy demand will grow by about 10 percent over the next 25 years.
While use of renewables is expected to double by 2040, they’ll still only be about 8 percent of the energy needed, by EIA estimates. As a result, Isakower said, natural gas and oil will continue to make up more than half of the country’s energy needs as far out as 2040. However, he said that over time, there will be a drop in demand for heating oil as customers continue to invest in weatherization and switch to other more affordable fuel sources like natural gas and propane. According to the EIA, oil and natural gas will continue to make up around 65 percent of the energy demand in New England through 2040.
Although US dependence on foreign oil has been a key issue for politicians, currently the nation’s biggest foreign supplier is Canada, and in 2012 the US exported more gasoline, diesel and other fuels than it imported. According to the International Energy Administration (IEA), the US will likely become the world’s largest producer of oil and natural gas by 2030.
"We’ve never really thought of the United States as being the focal point of oil and gas production," said Isakower. "We assume it’s Russia and the Middle East. The United States is going to be the number one oil and gas producer in the world, and it’s happening because of unconventional development."
As the easy-to-reach oil and gas has become more scarce, in recent years oil and gas companies have begun investing in "unconventional" extraction techniques to exploit more remote reserves. Those techinques include horizontal drilling and the controversial practice of hydraulic fracturing (aka, fracking). America’s fossil fuel industry has been growing at breakneck speed. Currently half of natural gas production comes from such unconventional activity and, according to the IEA, by 2015-2017, about a third of oil production in the US will come from such practices.
New England Imports
"As you move out to 2040, it’s going to be well over two-thirds and other sources say it will make up 80 percent," said Isakower. "Unconventional activity is where it’s at. That’s the future of oil and gas production."
A Carbon-Based Economy
There’s also the economic impact. While the economy has been sputtering for the past six years with private-sector job growth at one percent, from 2007 to 2012 there has been a 40-percent increase in direct jobs in the oil and gas field. According to a 2013 survey by the National Association of Colleges and Employers, with an average starting salary of $96,200, petroleum engineering is far and away the highest-paid major for members of the Class of 2013. According to a report by the multinational professional services firm Price Waterhouse Coopers, 9.8 million jobs were supported by oil and gas activities in 2011, which amounted to an industry impact of about 8 percent of US GDP.
The firm estimated 12,000 jobs in Maine were supported by the industry and another 28,000 (or 3.6 percent) were employed indirectly. According to IHS Consulting, in 2012, a total of 2.1 million jobs in the US were tied to unconventional extraction activities, amounting to $284 billion in 2012. By 2025, IHS estimated that unconventional development would contribute over $500 billion to GDP and a total of 3.9 million jobs.
For Maine, these practices are estimated to employ about 2,700 workers and are anticipated to employ 5,000 by 2035. This has led some like Isakower to believe that the growth in energy is helping to entice the country’s offshore manufacturing base back to the US.
"This is a big deal," said Isakower. "You often hear people talking about the energy renaissance and the manufacturing renaissance driven by unconventional activity. It’s very real and we’re just starting to get into it."
The Debate Over Natural Gas in Maine
In Maine it was an alliance of various industrial interests that helped pass the Legislature’s so-called "omnibus energy bill," which allows the Public Utilities Commission (PUC), with approval from the governor, to collect fees from ratepayers to buy up to $75 million annually in natural gas pipeline capacity, with the goal of spurring private investment in new pipelines into the state. This was a move that groups like the Maine Energy Marketers (MEMA) adamantly opposed.
"Whether people want to believe it or not, most areas in the State of Maine will never see a natural gas pipeline. It ain’t gonna happen. The cost is simply prohibitive," said Moore of Dead River.
Moore said that since the heating demand from homeowners for natural gas would only be in the winter, it would not be a big enough incentive to extend pipeline to most consumers other than large industrial users. Moore said diversity of energy sources and decreasing demand through more efficient burning technologies and weatherization is the way to go.
While opposing legislation that they say "picked favorites," MEMA has supported fees on energy users that could be reinvested into weatherization projects. Moore noted that currently propane is cost-competitive with natural gas. As recent Census figures show, the number of houses using propane has grown from 33,000 to 41,000 in the past five years (or 24 percent), while the percentage of homes using oil for heat has fallen from 75 percent to less than 69 percent.
"Economic development and prosperity in Maine will depend more and more on reliable, stable and resilient energy supplies that can survive on their own merits in the marketplace and support the competitiveness," said Moore. "To attract and grow and bring in new families, this state needs a diverse energy portfolio, one that allows new and cost-effective energy sources and one that utilizes technology to make the sources we get more efficient."
An Inconvenient Truth
Outside the forum a couple of protestors with the environmental group 350.org greeted attendees with placards calling for action on climate change and opposing any attempt to pipe tar sands oil from Canada through Maine to the port in South Portland. While the organizers of the forum insisted that the panel discussion had nothing to do with the heated campaign in South Portland over the proposed Waterfront Protection Ordinance to ban tar sands oil from the port, it was an elephant in the room that wasn’t ignored.
"I think there is climate change going on, and I think fossil fuels have a lot to do with it," said Moore. "Carbon footprints have a lot to do with it. I’m not going to deny that."
However, Moore said that the technology is not yet there to make the transition to workable, scaleable alternative energy sources.
Sitting in the audience, Dylan Voorhees, the Clean Energy Project Director for the Natural Resources Council of Maine, said the talk glossed over the fact that climate change poses an even bigger environmental and economic problem. He also challenged the assertion that renewable energy is not a solution, citing research by the National Renewable Energy Laboratory which found that by 2050 the U.S. could get 80 percent of its electricity from renewable energy.
"The unfortunate reality is that there is still an awful lot of fossil fuels in the ground," said Voorhees. "Far too much for us from an environmental and climate perspective."
Outside, Bob Klotz of South Portland had another word for the "unconventional" extraction techinques the industry reps were discussing: "extreme energy." And in spite of the arguments for economic growth and industrial society’s insatiable need for more energy, the continued exploitation of tar sands and natural gas reserves is a trend that climate change activists believe is killing the planet.
"Though we know we have their, and others’, attention, the reality of climate change does not support further growth of the petroleum industry," said Klotz. "But we also know we have quite the battle ahead of us."