The past year lacked a blockbuster energy story like the Deepwater Horizon oil spill in 2010 or the Fukushima Daiichi nuclear disaster of 2011, but it was nevertheless an interesting year in which several prominent trends that will continue to affect energy companies in the upcoming year. Here’s my take on the major stories that made the news headlines in 2012, in no particular order:

President Obama Rejects Keystone XL Extension, Endorses Southern Leg

When it looked like the Obama Administration was headed toward approving the Keystone XL Pipeline project in 2011, environmentalists organized protests at the White House against the “tyranny of oil.” The President bowed to the pressure and announced that it would be impossible to make a decision on the project before the 2012 presidential election. In January, Republicans passed a provision that forced the administration to make a decision, resulting in the State Department rejecting the application for Keystone XL extension due to insufficient time to study the project. However, during a campaign appearance in Oklahoma, the president endorsed the southern portion of the pipeline that would connect Oklahoma to the Gulf Coast, announcing that he would “cut through the red tape, break through the bureaucratic hurdles, and make this project a priority.” As I wrote after the election, the Obama Administration probably will approve the Keystone extension in 2013, which will benefit Canadian exploration & production companies.

The Fracking Revolution Continues

The hydraulic fracturing – or fracking — revolution in the US continued, with oil production at its highest level since 1998 and dry natural gas production at an all-time high. President Obama became the first president since Lyndon B. Johnson to serve in office during four consecutive years of increasing US oil production. Thanks in large part to fracking, the International Energy Agency (IEA) projected that by 2020 the US will become the world’s largest oil producer. They also projected that the US would become a net oil exporter again by 2030, which would be the first time that has happened since the 1940s.

BP Settlements

BP plc (NYSE: BP) settled criminal charges with the US government over the 2010 Deepwater Horizon oil spill for $4.5 billion, and a US District Judge in New Orleans approved a $7.8 billion settlement from BP to cover claims of economic and environmental loss. The US Environmental Protection Agency also suspended BP from bidding on new federal contracts as a result of the company’s actions leading to and following the oil spill.

Rigs Shift From Natural Gas to Oil

Because oil production has been more profitable than natural gas in recent years, there has been a huge swing in rotary rigs from drilling for natural gas to drilling for oil. This trend continued in 2012 as natural gas rigs fell to their lowest numbers in over a decade. In 2009 nearly 80 percent of North American rotary rigs were drilling for natural gas. By 2012, nearly 80 percent of those rigs were drilling for oil. We’ll continue to watch this trend closely in 2013, with an especially close eye on the supply and demand of rigs and how this dynamic affects profit margins for drilling stocks. 

California Implements Cap and Trade

California implemented the first legally binding greenhouse gas (GHG) cap-and-trade program in the US.  The program covers the state’s major sources of GHG emissions power plants, refineries, and industrial facilities. The program is intended to reduce California’s greenhouse gas emissions to 1990 levels by 2020. NASA scientist and climate change activist James Hansen criticized the program for not going far enough, calling it “half-baked” and stating that “it’s certain that it won’t be effective.”

California Gasoline Shortage

An August refinery fire at Chevron’s (NYSE: CVX) 245,000 bbl/day Richmond, Calif., refinery resulted in a shortage of gasoline in the state. The situation worsened due to an unplanned outage at an ExxonMobil (NYSE: XOM) refinery in Torrance. A gasoline shortage in the state ensued because refineries in most surrounding states do not meet California’s restrictive specifications. California’s gasoline prices spiked relative to the rest of the country, and some stations ran completely out of fuel. California Governor Jerry Brown attempted to alleviate the shortage by ordering an immediate transition to the less costly winter gasoline blends. As I wrote in October, the gasoline shortage benefits stocks of refiners with significant California operations – and indeed, the leading Golden State refiners have rallied since then.

Sanctions on Iran

The US and EU targeted Iran’s oil income as a result of their continued nuclear program. The sanctions cut into Iran’s crude oil exports, which account for the majority of the Iranian government’s revenues. Iran’s oil revenues were cut in half as a result of the sanctions, but global crude oil prices were largely unaffected as increased oil production in other countries picked up the slack.  

President Obama Reelected

President Barack Obama was reelected for a second term, which means that the energy policies of his first term are likely to continue. This was generally viewed as good news for renewable energy, bad news for the coal industry, and mildly bad news for the oil industry — even though the oil industry didn’t do too badly during President Obama’s first term.

India Blackouts

India’s overburdened power grid failed, resulting in the largest power outage in history. Three regional grids collapsed, cutting power to an astounding 680 million people. The country’s rail system was paralyzed, and there were major traffic jams in cities affected by the blackouts.

US Carbon Emissions Plummet

Coal consumption in the US continued to fall because new supplies of natural gas are displacing coal in power plants. The change has been so dramatic that since 2006, the US has been the world leader in reducing carbon dioxide emissions since natural gas emits less carbon dioxide per unit of power produced. US carbon dioxide emissions have fallen to a 20-year low as a result. The trend bodes well for natural gas demand over the long run, though with US natural gas proved reserves up about 50 percent since 2005, gas prices remain in the doldrums despite rising demand from power generators.

China in North America’s Oil Sands

China has long held ambitions with respect to North American resources. In 2005, China National Offshore Oil Corporation Limited (CNOOC) made a takeover bid for US-based Unocal, which was the 9th largest US energy company. The bid ran into serious political opposition, and was ultimately withdrawn. Having learned valuable lessons from their Unocal experience, in 2012 CNOOC made a successful $15 billion bid to take over the Canadian oil company Nexen. The deal is the largest-ever acquisition by a Chinese company, and gives China a more active presence in Canada’s oil sands. (China has already made investments totaling nearly $3 billion in Canada). Although approving the bid, the Canadian government also stated that future deals would only be approved under exceptional circumstances.

Hurricane Sandy

Hurricane Sandy struck the Eastern seaboard in October, leaving millions without power. In the aftermath of the hurricane, there were widespread gasoline shortages, leading to 1970s-era gasoline rationing in New York and New Jersey. Some refinery operations were temporarily disrupted, though without long-term damage.

CAFE Standards Doubled

The Obama administration announced tough new regulations that call for a near doubling of fuel economy by 2025 to 54.5 miles per gallon. The National Automobile Dealers Association criticized the new standards, stating that they would raise the average price of a new vehicle by nearly $3,000 and would make new cars unaffordable for nearly 7 million people.

EPA Rejects RFS Waiver Request

With the worst drought in the Midwest in many years threatening the US corn crop, many groups called on the US Environmental Protection Agency (EPA) to waive part of the mandated ethanol volumes under the Renewable Fuel Standard (RFS). The Washington Post even weighed in on the debate by calling on EPA Administrator Lisa P. Jackson to “ameliorate the situation by waiving all or part of the current-year ethanol mandate.” In November, long after the worst effects of the drought had passed, the EPA finally rejected the proposed waiver.

Low Natural Gas Prices Stimulate US Economy

For many years, industries that depend on natural gas as a major input have been leaving the US in search of cheaper gas supplies. These industries include chemical companies and fertilizer manufacturers. Low natural gas prices have led to resurgence in interest in projects in the US. The New York Times reported that Dow Chemical has identified 91 new manufacturing projects representing potentially $70 billion in new investments and up to three million jobs that companies have started or proposed as a result of cheap natural gas. And a report from the Yale Graduates Energy Study Group indicated that in 2010 cheap gas provided a net benefit to the US economy in excess of $100 billion.

Around the Portfolios

Baker Hughes Inc. (US: BHI) provided fourth-quarter guidance last week that included good news and bad. The good: the company expects international profit margins to hold steady despite lower-than-expected revenue trends. The bad: Baker Hughes said revenue and earnings would be lower than previously expected in the fourth quarter, citing weak onshore drilling demand and pressure-pumping prices. While we aren’t thrilled with the guidance, it was expected after Schlumberger’s similar update the previous week. Baker Hughes remains a solid long-term holding, but we wouldn’t add shares right now. Hold Baker Hughes.