Is the U.S. Really the World’s Top Oil Producer?

According to the recently-released BP (NYSE: BP) Statistical Review of World Energy 2014, the U.S. was the world’s largest and most diverse energy producer in 2014. The Statistical Review ranked the U.S.:

• #1 in oil production
• #1 in natural gas production
• #1 in nuclear power
• #1 in wind power
• #1 in geothermal power
• #1 in biofuels
• #2 in coal production
• #4 in hydropower
• #5 in solar power

The U.S. is clearly an energy production superpower, but we are an even greater energy consumer. Thus, despite the large amount of energy production, the U.S. is not energy independent. Our position as the #2 coal producer behind China (not coincidentally) mirrors our #2 position behind China in carbon dioxide emissions. And despite the rapid growth of renewable energy in both countries, carbon dioxide emissions in both countries rose to new record highs in 2014.

Perhaps the most surprising item from this year’s BP Statistical Review was that the U.S. jumped over Russia and Saudi Arabia to regain the crown it had held decades ago as the world’s top oil producer. The Statistical Review reported that U.S. oil production was 11.6 million barrels per day (bpd) in 2014 – nearly 1.6 million bpd higher than in 2013 for the largest one-year gain in U.S. history. This compared to 11.5 million bpd of oil production for Saudi Arabia and 10.8 million bpd for Russia:

However, some have disputed this new ranking and argue that it is merely a function of the way the BP Statistical Review defines oil. “Oil” in the BP Statistical Review is defined as “crude oil, tight oil, oil sands and natural gas liquids”, but excludes biofuels and liquid fuels produced from coal or natural gas. Oil consumption numbers do include all liquid fuels, so as a result reported consumption numbers are always greater than reported production numbers.

Most of the increase in U.S. oil production over the past decade is a result of increases in tight oil production in shale formations like the Bakken and Eagle Ford, and natural gas liquids (NGL) production from shale gas drilling in places like the Marcellus Shale. The key to whether the U.S. is now the world’s oil production champ hinges around the classification of NGLs.

NGLs are longer-chain hydrocarbons like ethane, propane and butane that are typically condensed out of natural gas during processing and sold separately. A typical composition of NGLs would be:

• Ethane (2 carbon atoms; 35-55 percent of the total composition)
• Propane (3 carbon atoms; 20-30 percent)
• Normal Butane (4 carbon atoms; 10-15 percent)
• Isobutane (4 carbon atoms; 4-8 percent)
• Pentanes and higher hydrocarbons, also called natural gasoline (5 or more carbon atoms; 10-15 percent)

As a byproduct of the shale gas boom, U.S. NGL production has risen to 3.3 million barrels per day, the highest level in history and an increase of about 1.5 million bpd in the past 5 years. U.S. oil production has increased by 4.4 million bpd in the past five years, thus just over a third of the increase in U.S. oil production by volume can be attributed to NGLs.

Those who argue that NGL shouldn’t be counted as oil, and therefore that U.S. oil production is overstated, do so on the basis of 2 points.

The first is that the energy content of NGLs is significantly less than that of crude oil. One gallon of crude oil has an energy content of about 138,000 British thermal units (Btu). One gallon of NGLs has an energy content of around 100,000 BTUs. Thus, just on the basis of energy content, critics argue that at best a gallon of NGLs is worth about 70% of a gallon of oil. And on the basis of price, NGLs are worth even less, having traded at less than half of the price of oil for several years.

The second objection to counting NGLs as oil is that critics argue that NGL isn’t fungible (interchangeable) with oil. Crude oil has numerous uses such as feedstock for petrochemical and plastics production – a role that can’t readily be filled by NGLs.

Both of these points are true, but I would offer up two pieces of information in response.

The first is that last month I attended a conference on flare gas mitigation. (Flare gas mitigation is an important subject that I will address in an upcoming column). Robert Zubrin was a speaker, and he hosted the conference attendees on a visit to his company – Pioneer Energy – outside Denver. Robert’s team is working on a number of interesting projects. They have a 2007 Chevy Cobalt that has been run on a number of fuels, including 100% methanol as documented here. But Robert and his team also modified the car to run on NGLs, which requires the same kind of conversion required to run a car on propane. He claimed that by modifying the timing he was able to achieve fuel efficiency equivalent to the performance on gasoline (36 miles per gallon to be exact), and that the car passed all of Colorado’s emissions tests. He relayed in a later conversation that they tested a blend of 50% diesel and 50% NGLs in a diesel engine and got the same performance as on 100% diesel. Thus, if a gallon of NGLs can replace a gallon of gasoline, then it is functionally oil.

Robert Zubrin and Robert Rapier at the Energy Frontiers International Gas Flare Reduction Conference in Denver

The second point I would make about NGLs is that they don’t have to replace all of the functions of oil in order to count as oil if they displace some of the products derived from oil. Again, consider the example of gasoline. The components of NGLs that are longer than butane can be blended directly into gasoline. Butane can be blended in quantities up to about 10% in winter (See Refining 101: Winter Gasoline). Butane can also be processed into valuable gasoline blendstocks such as alkylates. Lighter NGL components like ethane and propane can be further processed to produce petrochemicals, or they can be used directly as transportation fuel.

So, should the U.S. really be getting credit for oil production as a result of the increase in NGL production? Yes, for the most part. A barrel of NGLs can replace most of a barrel of oil. It’s much more accurate to count NGLs as oil than it is to discount them as insignificant — which is effectively what some critics have done.

Industry is still responding to the shale revolution, but the response takes some time. The shale oil that is being produced is too light for many U.S. refiners, so it is presently trading at a discount to lower quality international crudes. And the NGLs that are the byproduct of shale gas production have overwhelmed the market, temporarily cratering the price. Both of these situations are likely to be temporary as the market reacts to these cheap feedstocks.

If NGLs continue to sell for half the price of gasoline, we will likely see a migration to more vehicles that are capable of running off of NGLs – which were recently trading at $0.60/gallon. We are already seeing chemical manufacturers respond to cheap NGLs by building new ethylene production capacity in the U.S. (Ethylene crackers use ethane – the major component of NGLs – in the production of ethylene, one of the most important industrial chemicals in the world). In the long run, the extent to which NGLs are used to displace oil will largely be a function of economics.

Conclusions

Returning to the initial question, did the U.S. become the world’s largest oil producer in 2014? According to the definition BP uses to count oil, then the answer is yes. But based on the energy content of the fuel, then no. If BP had counted “barrels of oil equivalent” (BOE) instead of simply “barrels”, then U.S. crude oil production would have been about a million barrels per day lower because the 3.3 million bpd of NGL production would have been about 2.3 million BOE of production. Production for Saudi Arabia and Russia would have also been adjusted down because they make NGLs as well, but in not nearly the volumes produced by the U.S.

However, if we consider all energy production, then the U.S. is the undisputed champion according to the BP Statistical Review. The U.S. is the only country in the world that is in the Top 3 in the categories of oil production, natural gas production, coal production, nuclear power production, and overall renewable energy production.

Energy Trends Insider