President Obama’s Offshore Drilling Ban: Politics or Price Mover?

Author: Scott Whitler, Account Manager, Kinect Energy

On December 20th, President Barack Obama, under urging from environmentalists and Democratic Congress members, moved to indefinitely block oil and natural gas drilling in U.S. waters in large sections of the Arctic and Atlantic oceans. Using a provision in the Outer Continental Shelf Lands Act of 1953, President Obama effectively banned offshore drilling in 118.8 million acres of U.S. waters. This covers a large majority of the Beaufort and Chukchi seas in the Arctic and 31 underwater canyons in the Atlantic. The move comes as a direct counter to President-elect Donald Trump’s campaign promise to increase domestic oil and natural gas production.

Source: Bureau of Ocean Energy Management

The law does not state a clear provision for reversal; therefore, the ban will hold in place pending what will most likely be a lengthy legal battle or action from Congress to amend the underlying Act.  It is certainly not permanent, but not something that President-elect Trump can simply throw in the back of the Obamas’ U-Haul as it pulls away from the White House.  So the question becomes “Is this simply political posturing or something that will have a significant impact on oil and gas production and pricing?”

According to Bureau of Ocean Energy Management (BOEM) estimates, there are nearly 31 billion barrels of oil and 169 trillion cubic feet of natural gas classified as undiscovered and technically recoverable in the Arctic and Atlantic outer continental shelf of the United States.  That’s an impressive amount, but comes with significant challenges to drilling.  The BOEM forecasts that crude oil prices would need to be $100 per barrel or natural gas prices $5.34 per Mcf for the resources to be drilled economically.  Royal Dutch Shell had been the only company actively exploring in the Chukchi Sea off the Alaskan coast, but halted those plans earlier this year and took a $4.1 billion loss for their efforts.

The bottom line is this action will have little to no impact on near term oil and natural gas pricing.  What it does impact is the ability of producers to plan operations in those areas.  It can take years of planning and billions of dollars to drill and move these resources to market and this uncertainty will make it hard for producers to commit resources to these areas.  Drilling efforts will most likely continue to be concentrated in the Gulf of Mexico and onshore shale plays, leaving these areas dormant until a clearer policy is established.  President-elect Trump has made it clear that his energy plan will be fossil fuel friendly so we can expect that he will work to overturn this ban.  How successful he proves to be will go a long way towards determining if these large reserves of oil and gas ever have the opportunity to become part of the U.S. energy mix.

Rising Electric Utility Investments Increases Your Need to Pay Attention

Author: Dale Thielen, Account Manager, Kinect Energy

Most likely, without your awareness, 2016 electric utility capital spending will increase your 2017 electricity rates. “How much?” you ask. It depends on various factors including local grid and energy market conditions, regulatory oversight, and stakeholder involvement.

Electric utilities are investing in clean energy and grid modernization to reduce carbon emissions, improve reliability, boost security, integrate central station power with distributed generating resources, and offer consumers more choices.

The Edison Electric Institute (EEI), an investor-owned electric utility trade organization, estimates its member electric companies spent $120 billion in 2016 grid work and clean energy development. To better understand the magnitude of this investment, consider year-end 2015 investor-owned electric utilities’ net assets in service were $898 billion, according to the EEI. Since 2016, capital spending represents over 10 percent of the 2015 net assets in service. Expecting no rate increase would simply be naive.

Regulated electric utility assets have trended upward over the last several years while revenue has trended down. Energy efficiency efforts and offshore (formerly domestic based) U.S. manufacturing has constrained electricity demand, according to the EEI. (Annual growth in electricity output from 2013 to 2015 has been under one-half of one percent.) Spreading increasing fixed costs over fewer megawatt-hours means utilities need to increase rates to adequately recover costs.

Regulators are sensitive to utility cost recovery, so consumers should expect to see continued approval of rate increases. While utility commissions are charged with granting appropriate rate increases, protecting all consumer segments is a balancing act which often yields in favor of the residential rate class. Consequently, commercial and industrial consumers are more frequently participating in rate cases as interveners.

The rate case process involves two primary decisions: identifying allowable costs; and determining cost allocation among the rate classes. All interveners receive a common benefit when their collective efforts reduce the amount of allowable costs. However, interveners often have competing interest on cost allocation. Residential customers are automatic interveners, represented often by the state office of the attorney general. Absent other intervening groups, costs are sure to be allocated to the advantage of residential customers at the cost of commercial and industrial consumers.

Another regulatory proceeding to monitor relates to the electric utility’s long range plan. This “Resource Plan” describes supply and demand side capital initiatives and resulting rate impact scenarios. While these proceedings tend to fall below the public’s “radar,” stakeholders are paying increasingly more attention because of future cost and environmental impact.

As the electric utility industry continues to invest significant capital in transforming the grid and reducing carbon, consumers can ill afford to remain passive. Prepare to engage!