In the early 1970s the U.S. found itself held hostage by the Arab oil embargo. Spoiled by years of cheap gasoline and superpower status, the country had to adjust to shortages it hadn’t experienced since World War II. In response to the crisis, the concept of “energy independence” shone like a beacon of hope to a disgruntled population.

Forty years later, the shale gale has brought that beacon much closer to reality. But those 40 years also have witnessed a sea change in the way the world harnesses energy. Fossil fuels continue to be the primary source of energy, particularly in terms of transportation, but renewable energy is gaining a larger foothold, and even countries that have abundant fossil fuel resources often rely on other energy sources—Norway, for instance, generates most of its electricity through hydropower.

In the following pages we examine the concept of energy independence and how it fits into the modern global paradigm.

Independence day

Behind the flag-waving and rhetoric are some hard questions about the reality of U.S. energy independence.

By Rhonda Duey, Executive Editor

In late September a tanker loaded with crude oil set sail from Valdez, Alaska, en route to South Korea. In the great scheme of things, this may not seem particularly newsworthy. But it could be a sign of things to come.

Even though the U.S. ban on crude oil exports does not include Alaska, no crude shipments have left that state for other countries in a decade. But Erik Nikolai Stavseth, an analyst at Arctic Securities ASA, told the Los Angeles Times that the traditional markets for Alaskan crude, oil refineries on the West Coast, have found new suppliers with the enormous rise in domestic production.

This is just the latest indication that the energy picture in North America has shifted drastically in the last few years, evidence of the “shale gale” that has opened up vast amounts of previously inaccessible hydrocarbons in provinces that only a few years ago were considered mature, declining or even dead.

It has taken the U.S. awhile to come around to this new way of thinking. Many in the country hope for an executive order from President Barack Obama to lift the ban on crude exports, a move which many don’t expect until at least after the November elections and more likely in 2015. While U.S. operators anticipate the potential lifting of the ban, they face continued low gas prices, declining oil prices and refineries that are ill-equipped to handle the light crude being produced from shales.

Why the ban?

Turning the clock back more than 40 years, a country used to cheap gasoline suddenly had a wakeup call when the Arab oil embargo hit. Gas lines formed, thermostats were turned down and Americans were forced to face the fact that sometimes not-so-friendly Middle Eastern countries could control their energy destiny. The term “energy independence” seemed to be a pipe dream, yet politicians did what they could to ensure that what little domestic supply the U.S. did have would be available to the country in times of a crisis. So a ban on crude oil exports was enacted.

Four decades later the ban is a thorn in the side to many. “This whole ban on crude exports is very strange because we are the largest exporter of products today,” said Daniel Yergin, vice chairman of IHS and author of The Quest: Energy, Security, and the Remaking of the Modern World. “This ban on crude oil exports is a relic of the 1970s, which was a very different world with price controls. It’s an archaic remnant that didn’t matter for years. Now it actually matters a lot because we’re seeing a renaissance of U.S. oil production.”

Added ExxonMobil CEO Rex Tillerson, speaking recently to the Greater Houston Partnership, “For decades now the U.S. has pursued energy policies based on the fear of scarcity. The thinking in Washington, D.C., and even some energy companies was that reviving domestic energy production was simply a dream. That’s now the old way of thinking.”

While there is a general consensus that lifting the ban would be good for operators and not so great for refiners, views differ as to the real short- and long-term consequences of such an executive action. “In the short term, we would expect the price of crude to temporarily increase,” said Charles Dewhurst, leader of the natural resources practice at BDO USA. “Pricing differentials in other markets would likely disappear amid an easing of the existing U.S. refining backlog and a consequent amelioration of bottlenecks in pricing and storage.”

Longer term, he said, there could be increased pressure for transportation solutions such as the Keystone XL pipeline. “In addition, the harmonizing of global oil prices and free trade principles would allow the U.S. economy to grow even stronger.”

Lifting the ban will likely also be a matter of political timing in response to market factors, said Deborah Byers, energy market segment leader for Ernst & Young. “I think the industry is sensitive to the fact that exporting crude in the face of rising gasoline prices is not prudent. One thing to note is that refined product can be exported [already], and such exports have been rising. This may be the natural market result of our current policies.”

If the ban is not lifted, domestic operators may be stuck watching prices further decline, said Jason Stevens, director of Morningstar’s equity analyst team. “We think it’s a matter of fact that the amount of light crude that will build up in storage in the Gulf Coast will begin to a) be tremendous and b) pressure Louisiana Light Sweet and West Texas Intermediate pricing. Without removing that ban, we’d expect price benchmarks in the U.S. to drop enough to discourage production adds over time.”

Energy independence

So could the pipe dream be real? Could the U.S. really wean itself from “foreign oil” and be self-sustaining?

Perhaps the better question is should this even happen? “There is nothing magic about the U.S. becoming a zero net importer of oil or energy in total,” said Mark Schwartz, president of PIRA Energy Group. “We are already much less dependent on the Middle East and the rest of the world for oil, and this is already impacting our trade balance, domestic energy policy and maybe even Middle East political decisions. So the impact of reduced dependence is very real even if we are still net dependent on some imports.”

Added Don Paul, professor and William M. Keck Chair of Energy Resources at the Viterbi School of Engineering at the University of Southern California, “The past high level of dependence on imports from some OPEC members put the U.S. in a more complex geopolitical position, but the flattening U.S. fuel demand and growing domestic production has changed this balance materially.”

The discussion also needs to be put in the proper context. Fear mongering has made Americans leery of oil coming from unstable countries, but there’s much more to the picture than friends and enemies. “People used to talk about energy independence or reducing imports in terms of what it meant for security and trade,” Yergin said. “What people didn’t realize is what it means for a domestic economy. We estimate that already over 2 million jobs were supported by the unconventional revolution by 2012, and that number could reach 3.3. million by 2020.”

Then there is the global aspect to oil. A protectionist approach is in no one’s best interest, the experts noted. “What we need is energy interdependence, a global market in which the U.S. has more influence as both a major supplier and the biggest consumer,” said Loren Steffy, a consultant, columnist and author.

Added Byers, “You can go around the political merry-go-round as to whether some imports are ‘worse’ than others. The reality is that all imports have balance-of-payment implications.

“But from an economic perspective, trade is not necessarily bad. Even if the U.S. imported little oil from the Middle East, as long as our allies need that oil, we will have to share some of the consequences of a possible cutoff in supplies. We are not an island.”

LNG brings another component to the table. While oil has been a global market for decades, natural gas tends to be a domestic market due to transportation issues. But LNG exports could help minimize the disparity between low prices in North America and high prices in Europe and Asia.

“In terms of LNG—fantastic; let’s do it,” Stevens said. “By 2020 we imagine somewhere in the neighborhood of 10 Bcf/d [283 MMcm/d] of export capacity to be online, fully permitted and operational. But it’s uncertain whether there is an additional 10 Bcf/d that can come from the U.S. without a significant price response.”

LNG projects are not without their headaches. Already some of Australia’s projects are experiencing severe delays and cost overruns. And progress has been nearly glacial on U.S. projects.

However, Steffy said, if companies are willing to spend the money, this could be a market to contend with. “Even with all of the expense, the U.S. is still one of the lowest cost producers of natural gas in the world. LNG exports could pave the way toward a more global gas market, which would create greater price stability.”

Added Yergin, “I think the U.S. will be a supplier to Europe and Asia. When I’m in Asia, I hear it all the time—Asia would very much like to have U.S. LNG in their supply portfolio.”

Appreciating the reality

Amid the debate over oil exports and LNG terminals is a deeper sense of awe that this conversation is even taking place. Many Americans make comments like, “If I’d predicted this five years ago, people would have said I was crazy.” The ability to extract hydrocarbons from shales has changed the traditional energy picture for the foreseeable future. And it has helped the world withstand geopolitical forces that could have destabilized it in the past.

“When you look at what’s happening in the world, the crisis with Russia and the Ukraine, what’s happening in the Middle East, what’s happening in West Africa—we would be facing an oil crisis today had it not been for what happened with domestic oil production,” Yergin said. “Prices would be much higher, and people would be talking about gas lines. There would be congressional hearings and investigation. All of these things would be happening, and we would feel much more vulnerable than we do.

“The impact of this is not just in terms of energy supply and demand. It has much more far-reaching impacts on our overall economy, our position in the world, our foreign policy and our security,” he emphasized.

An unconventional path to energy independence

Japan finds a path to energy independence by applying its technology prowess in unconventional ways.

By Jennifer Presley, Senior Editor, Offshore

For Japan, the path to energy independence has never been a traditional one. Limited in its natural energy resources, for many years the country has relied on fossil fuel imports and adopted less traditional forms of energy like nuclear to meet its power generation needs. By doing so, the country has paid a great price—both financial and environmental—to support the more than 127 million people that call the island country home.

As the world’s leading importer of LNG, Japan’s 2010 imports reached about 93.5 Bcm (3.3 Tcf), accounting for about 31% of the global LNG trade, according to a Rice University Baker Institute Center for Energy Studies report.

After the March 11, 2011, earthquake and tsunami and the Fukushima nuclear accident that followed, the country’s reliance on fossil fuels increased to offset the decline in power generation. More than 40 nuclear power plants were shut down because of safety concerns at the time. Nuclear energy consumption dropped from 292 terawatt hours (TWh) in 2010 to about 18 TWh in 2012, according to the BP “Statistical Review of World Energy 2014.”

The total cost of power generation increased from 7.5 trillion yen in 2010 before the Fukushima Daiichi accident to 9.6 trillion yen in 2011 and 10.6 trillion yen in 2012, according to an Institute of Energy Economics Japan (IEEJ) report. Fuel cost for thermal power generation rose sharply, from 3.7 trillion yen in 2010 to 6.1 trillion yen in 2011 and 7.3 trillion yen in 2012, almost doubling in the two years from 2010 to 2012. The cost of purchasing natural gas and fuel oil increased the most, the IEEJ report noted.

High energy costs and a lack of natural energy resources has helped to propel the country over the decades into a leadership position in the development of innovative energy technologies. Japan—through its energy dependence—helped to advance energy technology R&D in a variety of areas to the benefit of many. Japanese companies have lent their design, construction and project management expertise to a number of the largest upstream oil and gas projects around the world. In doing so, they also harnessed the knowledge gained through those experiences and applied it in areas like the commercialization of methane hydrate or the conversion of waste plastic for oil.

Harnessing the ‘fire in the ice’

It goes by many names—the “fire in the ice” or the “fiery ice from the sea” are a few of its more colorful names—but methane hydrate is a curious clathrate that has generated much interest in recent years, especially in Japan.

Consisting of a gas molecule trapped in an ice-like cage, hydrates can store considerable amounts of gas in a small space. A cubic meter (35 cf) of hydrate can hold about 160 cu. m (5,650 cf) of natural gas at standard pressure and temperature, according to a 2004 National Resource Council report.

Found throughout the world’s coastal margins and polar regions, hydrates form at low temperatures and elevated pressures. When one of the conditions changes, the hydrate begins to dissociate, prompting the release of the gas molecule.

About 1.1 Tcm (40 Tcf) of methane contained in methane hydrate deposits in marine sediments has been confirmed in the eastern Nankai trough area off the Pacific coast of Japan. According to Japan Oil, Gas and Metals National Corp. (JOGMEC), this is equivalent to 11 years of the amount of LNG currently imported into the country. An additional 120 Mcm (4.2 MMcf) of gas in methane hydrate deposits has been discovered off the coast of the Aichi Prefecture in central Japan.

To access this resource, the country’s Ministry of Economy, Trade and Industry launched in 2001 the Japanese Methane Hydrate R&D Program. Over the years, researchers from JOGMEC, the National Institute of Advanced Industrial Science and Technology and other institutions have participated in several international joint studies on hydrate production, including two onshore tests at Canada’s Mallik Field. JOGMEC researchers also played an active role in hydrate R&D efforts in the Gulf of Mexico and Alaska.

In March 2013, JOGMEC announced the first successful production of gas from offshore hydrate deposits at an operation site located at the Daini Atsumi Knoll off the coasts of Atsumi and Shima peninsulas. About 120 Mcm of gas was produced over the six-day field test, at a rate of 20 Mcm/d (701 Mcf/d), according to a JOGMEC press release.

A second offshore production test is scheduled for Phase 2 with the goal of establishing a technological platform toward future commercial production in Phase 3, which is scheduled for 2016 through 2018.

On Oct. 1, Inpex Corp. announced its participation in the formation of the Japan Methane Hydrate Operating Co. (JMH). Inpex, along with 10 other Japanese companies, formed JMH with the aim of participating in the medium- to long-term offshore production test of methane hydrate. The company plans to provide field operations support and share its findings among Japan’s private sector companies, according to a release.

Plastic oil fields

When Hiratsuka-based inventor Akinori Ito sees a plastics-littered landfill, he does not see trash but opportunity. In looking for a way to recycle waste plastic into something useful, Ito invented the Blest Machine. It is a table top-sized machine that converts recyclable plastics—polypropylene (PP), polyethylene (PE) and polystyrene (PS)—back into oil. It does this through the pyrolysis method, according to the company website.

Ito, the CEO of the Blest Corp., said in a TEDxTokyo video presentation that on average 1 kg (2.2 lb) of plastic waste is converted to 1 l (0.26 gal) of oil. The recycled oil can be used as fuel for boilers and incinerators. For gasoline or diesel-fuel equivalents, the company recommends using PP or PE plastics. This “mixed plastic oil” requires further refining using an inline distillation unit to separate the equivalents from the oil. Purified oil from PS can be used as a raw material for plastics, according to the company.

A larger machine—the B-240 (NVG 220)—is capable of converting 200 kg (441 lb) of plastic waste continuously over a 24-hour period. The B-240 (NVG 220) machine was installed in a Whitehorse, Yukon, Canada, recycling center as part of a year-long pilot test in 2012. The results of the test conducted by the Cold Climate Innovation group of the Yukon Research Center at Yukon College were published earlier this year in the “Blest Plastic-to-Fuel Project” report. In it, researchers noted that the system met or exceeded expectations from both an environmental and economic standpoint.

“CO2 emissions from the machine were 186 g per 1 kg of waste plastic processed, compared with as much as 3,500 g per 1 kg of plastic processed using traditional methods,” the report said. “Economical investigations have successfully demonstrated that the Blest B-240 turns waste plastic that has a negative economic value (i.e., shipping costs exceed value of product) into a high-profit product. The B-240 (NVG 220) machine is capable of producing 1 l of fuel at a cost as low as [CA]$0.31 per liter; larger machines produce the fuel at [CA]$0.14 per liter.”

The B-240 (NVG 220) is sized for communities of up to 1,400 people, while the largest sized machine is capable of supporting communities up to 126,000 people, the report noted.

Through its support of thinking outside the traditional energy “box,” Japan continues to walk an unconventional path toward energy independence.

All forms of energy, new technology needed for energy independence

Finding newer and lower cost forms of energy that can be produced, refined and used in the most economical way is the goal for energy independence.

By Scott Weeden, Senior Editor, Drilling

Energy independence is not about reducing or even eliminating imports of crude oil, although for the U.S. that is part of the equation. Having enough different sources of energy to make the economy more flexible and attractive to new business makes economic decisions easier and would lead to energy independence.

“In terms of independence a new source of local energy supply certainly enables the economy to import less and receive the benefit of ongoing lower energy costs, which is good for the overall economy,” said John Kunasek, national sector lead for energy and natural resources, KPMG LLP.

“It’s not just oil and gas. It is new forms of greener energy like solar and wind technologies. It is also technologies that enable us to perform more efficiently and be less energy intensive, which makes energy more abundant and overall cheaper,” he continued.

“Independence means flexibility. It also means the ability to access new resources more efficiently and effectively.”

Lower cost energy equates to better business, which in turn means more jobs. “Is independence the most important thing? I would say no if it comes with a cost. You could be totally independent in terms of energy supply. But if it was at a higher cost, you would not be competitive with other economies that might be able to use energy at much lower costs,” he explained. “I think the flexibility and access to all forms of energy are more important goals.”

Cheaper, greener energy

The goal is to find newer and lower cost forms of energy, whether it is new supply or new technology that can be produced, refined and used in the most economical way.

“In terms of independence, I think of it in terms of more supply, more forms of energy, cheaper and greener energy. I think that is really what most customers want,” Kunasek said.

“The opportunity is to have as much flexibility as possible and access to the most economical forms of energy. That would be the most optimum goal. That wouldn’t necessarily be independence, but it would be free access to the most economical forms of energy that would be most important,” he continued.

Global connectivity

However, energy independence also means access to markets. The U.S. government is now considering approving more crude oil exports and has allowed the export of LNG. The oil and gas industry is interconnected globally.

There is a debate over whether countries should be independent or interdependent when it comes to energy. “I don’t know if the goal would be interdependency or independence. From our perspective, the goal would be efficient energy markets and the lowest cost energy to enable the maximum optimization of the economy,” Kunasek explained.

Many countries with few natural resources would consider energy independence consisting of energy security. Japan and Korea are examples of countries that place an emphasis on energy security.

“Europe currently has a significantly higher energy cost structure. It doesn’t have as much of its own domestic forms of energy. From a European perspective, the goal would be to get access to more forms of lower cost energy. That is obviously one of the opportunities driving the resurgence of LNG exports in the U.S.,” he added.

The markets in Europe are more favorable in terms of energy prices, which is attractive for LNG imports. Both Eastern Europe and Europe have been relying for years on natural gas imports from the former Soviet Union. Russia increased its prices, and European countries are seeking alternatives.

“You have a much lower cost of natural gas coming out of the U.S. even when you add the cost to liquefy and transport the natural gas. The Europeans see a favorable opportunity to receive supplies from lower cost locations such as the U.S.,” he emphasized.

Europe is faced with an infrastructure challenge, especially the Eastern European countries. Most pipelines run east to west from Russia. If more LNG, for example, is imported to Europe, there would need to be additional infrastructure to move the natural gas from west to east. That is the main challenge for Ukraine to diversify its energy supplies.

Europe has “less flexibility in where it is getting its energy supplies, and prices are higher than what might be available on other global markets. The solution is to have better access to global energy supplies such as cheaper natural gas and have the infrastructure to get the supplies to their economies,” he continued.

Huge resources, no independence

While countries with fewer natural resources are scrambling to find additional energy supplies, countries at the other end of the energy spectrum—Tanzania and Mozambique, for example—have huge gas reserves but are not energy independent.

“It is not only important to have known energy reserves in your country, but you also have to have the economy that needs the energy supplies, which are going to flow to the economies that have the greatest needs and the best markets,” Kunasek said.

“Once you have the economy, it becomes more economical to build the infrastructure to be able to deliver the energy, whether it is to a refinery, gas plant or shipping terminal. That infrastructure is really critical because it requires a lot of capital, and it takes a long time to develop,” he continued.

Those countries are independent in that they have available energy supply. “But if you’re defining them as truly independent, they really need the markets to sustain the infrastructure that needs to be built to deliver it. If you truly want to be independent, you have to have the infrastructure to deliver it. It comes down to economics,” he emphasized.

Grid parity

Even though economics are important, technology is another trend that is worth watching. For example, on the electricity side of the energy business, there is a trend around distributed generation and cheaper forms of localized energy supply.

“In some areas, costs associated with distributed forms of energy have grid parity with other forms of energy. Grid parity measures the economics associated with local forms of supply like distributed generation and the delivered cost of current electric energy. My point here is to watch technology and the cost associated with more localized forms of supply,” Kunasek explained.

The electricity industry could follow the telecommunications industry. “If costs come down as technology breakthroughs continue to occur, you could see almost a leap-frogging effect over expensive delivery infrastructure and construction,” he said.

For example, in rural parts of Africa, there are no telephone lines. However, wireless telephones are available in those areas. “With the costs low enough, you have localized supplies that don’t need infrastructure, that don’t need a wire or transmission line. In the U.S. the wireline telecommunications industry almost doesn’t exist anymore. The wires are still there. If you look at Africa, they don’t even have the wires; it’s only cell towers.

“If you have a localized form of energy where it is needed and it is cheap enough, it will develop and take off. Eventually localized energy will happen similarly to what happened with telecommunications. In energy, there’s a similar trend that is beginning to happen associated with delivered or distributed forms of generation. You could achieve a higher degree of energy independence without the need for the delivery infrastructure,” he emphasized.

These different distributed generation systems include commercial energy storage, solar, micro-wind and micro-generation. If the cost trends for these continue to go down, “then you could have that leap-frogging effect where you wouldn’t need all of the delivery infrastructure,” he added.

A lower cost form of distributed energy could be a significant technology breakthrough to give energy supplies to 1.5 billion people who don’t have access to electricity. “It has the potential to change dramatically the energy footprint in the world,” Kunasek concluded.