This "Big Story" is Turning the Energy Market on Its Head

by | published October 29th, 2013

The revolution in unconventional shale gas and tight (or shale) oil is changing everything we use to think about energy.  Along the way, it’s creating a new energy balance.

That is especially true in North America, where the genuine opportunity for energy independence could become a reality as early as 2020.

This massive shift is possible only because both the U.S. and Canada are rapidly transforming from net importers to net exporters of both crude oil and natural gas (via liquefied natural gas, or LNG).

This is a transition that Canada actually reached a while ago.

In fact, the Western Canadian Sedimentary Basin and its combination of conventional and unconventional production made Canada less reliant on imports well before the shale revolution set in.

The “big story” today, though, is what is happening inside the U.S

A Reversal of Fortune

Thanks to the largess of shale gas, all the discussions that the U.S. would need to import LNG have suddenly ended.

Of course, we only have to go back to 2005 and 2006 when the exact opposite was true.  At the time, most analysts (including myself) were suggesting the U.S. would need to import as much as 15% of its gas annually.

Well no more. Beginning in about a year, this revolution will start moving in the opposite direction as the U.S. starts exporting LNG to both Europe and Asia. Canada will begin phasing in LNG exports from the Pacific Coast as well.

But the ability to meet domestic gas demand for internal resources is not the real reason the import/export mix is changing so dramatically.

The real energy independence is now happening on the oil side.

Only three years ago, the U.S. was importing almost 70% of its oil. Today, the figure is closer to 50% (or less by some estimates).  What’s more, at current projections, this figure will decline even further to the low 30s in about ten years.

By that time, what America needs to import will largely come from a close-in source: Canada.

Oil production will also come in higher this year than at any point since the 1970s, while the exports of oil products are increasing.  My own view is that we will also see some relaxation of the rules when it comes to moving crude out of the country.

However, this is as much a political issue as it is a market consideration.

The Big Push to Export Oil

The problem is that domestically produced oil is looked at as a “strategic commodity” making its export difficult. Nonetheless, there are two categories where it is already allowed.

The first involves the special treatment of the heavy oil coming from the Monterey basin in California. Exports are permitted here because the heavily discounted crude has difficulty finding decent sale prospects in the states. It is expensive to process and requires costly refinery upgrades.

Second, there’s the prospect of tolling. This is the process whereby a raw material (in this case crude oil) is exported and the refined result (i.e., oil products) it is imported back into the states. Tolling is well understood in metals, especially in the production of aluminum.

But now there is a whole new dynamic forming over the possibilities of tolling. That’s because we are also experiencing an increase in the gasoline and diesel leaving the U.S. Oil products are not covered by the same export restrictions as is the initial crude itself, although periodic regional shortages do occasionally limit export flows.

The export of crude from the U.S. is likely to increase for two reasons, both of which undercut the “strategic commodity” concerns.

The first addresses the quality of some tight oil produced. This will be heavier, lower quality volume similar to the current Monterey allowances. Opening an export market for this quality of crude would allow for increased production.

Second, the overall production levels will prove to be decisive. We still don’t know how sustainable unconventional sources really are. If tight oil ends up being a phenomenon of only a few decades in duration, export potential will be lessened.

However, that conclusion is still in the future. By all indications, we probably have much more extractable unconventional oil than originally thought. That being the case, the pressure against exports promises to decline.

Finding New Ways to Profit

And there is now no question the availability of shale gas and tight oil worldwide is much higher than the figures had suggested even two years ago.

In fact, just this past June, the Energy Information Administration (EIA) released a revision of its global tight oil reserve figures and they were staggering.

U.S. shale gas reserves were higher in the revised study, but the new American total left the U.S. fourthin the world – behind China, Algeria, and Argentina. Initial EIA projections on the oil side also show the potential for unconventional reserves are at least 60% as much as all the conventional oil known to exist worldwide.

In short, this unconventional revolution is initiating a massive shift in energy balance expectations internationally. That was the primary reason why I was invited to London last week to brief such a high-powered audience.

And while all the attention is directed at production prospects, I am already looking to other places for new investment opportunities.

For instance, we have already talkedabout the accelerating use of rail to move crude oil in North America, especially from Canada to the U.S. as an alternative to the controversial Keystone XL pipeline.

Then this morning another interesting wrinkle emerged. Gas Business Briefing reported that the use of barges to move unconventional oil will be increasing as well.

In fact, industry observers are now saying this could be the biggest jump in barge profitability in over 30 years.  So the use of barges adds another enticing element.

River systems in other parts of the world have developed barge traffic as well. As unconventional production ramps up, so also will reliance on barges to move it.

Once again, what began in North America is providing yet another investment direction elsewhere. That means additional ways to profit for all of us.

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  1. Thomas Ryan
    October 29th, 2013 at 14:08 | #1

    I understand that TRAINS and RAILROADS will soon replace PIPLINES. Is that resonable?

  2. Robert in Canada
    October 29th, 2013 at 14:22 | #2

    Just to clarify something – Eastern Canada (Ontario and Quebec) import all of their oil from outside of Canada, mainly from Nigeria, Saudi Arabia, and Venezuela.

    There is a proposal to use an existing gas pipeline to ship oil instead of gas from western Canada to eastern Canada. But of course the left-wing and assorted enviro-nuts are all opposed.

    They prefer buying oil from countries that treat women like pigs, and kill gays just for fun, instead of buying oil from western Canada.

  3. October 29th, 2013 at 16:35 | #3

    yes, this is great oil and gas play….

  4. yngso
    October 29th, 2013 at 17:43 | #4

    Meet the new new Vanderbilts, Mr Warren B. and our own Dr M. Their strategy is hardly visionary, because a while ago there was a guy called Rockefeller who started using pipelines. He´s gone now, and the two guys mentioned above were very young then, but I´m sure they remember.
    Obama opposing the KXL and WB supporting him, what a coincidence! Me oh my! My respect for WB has taken a hit, to put it mildly. Also he loves Coca Cola – he probably has afew billion USD parked there – and says he drinks 5 a day, rotting his gut.
    Obama is soon gone, but there´s no sign that that the Reps are going to get it together and do anything useful anytime soon, so the rail play can probably keep travelling for some years, choo choo. Let´s just be honest and call this an opportunistic trade. This has nothing to do with progress towards anything. Politicians in my country say abut their opponents that they are “going backwards into the future”…

  5. October 29th, 2013 at 17:59 | #5

    I’m a subscriber, but I don’t see any suggestion of what is the stock symbol for this particular play. Please send your kind response ASAP.
    Thanks a million for your upcoming answer.

  6. Charles Hof
    October 29th, 2013 at 18:36 | #6

    While the extraction from shale and the possibilities open many opportunities the methods need some serious refinement to elevate the contamination and pollution in the area around the process. Once resolved then the public needs to be educated as well as the investors.

  7. Ann Coletta Doyle
    October 29th, 2013 at 20:43 | #7

    Dear R. Moors,
    Thank you for your clear writing. I have heard about the possiblity of
    shale oil since I was a young girl. Fracking and tolling are new
    words in my vocabulary. I,too, wonder about the refinement of methods in relation to contamination and pollution.
    What’s the plan for both safety and profit?

  8. Eric S
    October 29th, 2013 at 21:46 | #8

    Look at Origin Oil. They claim to have some solutions for the contamination and pollution caused from fracking. I don’t know how close they are to a commercial application.

  9. John Grayson
    October 29th, 2013 at 22:00 | #9

    Barges. Interesting. I was listening to Cousin Brucie on satellite radio a week or so ago and he had a request call come in from an old river captain who was barging oil down the Mississippi. This is definitely happening. N.Dakota crude moving south down the great river to gulf coast refineries.

  10. Loyst Streeter
    October 30th, 2013 at 12:06 | #10

    Dear Mr. Moors:

    Already, the inherent problems with fracking are being felt in many parts of the country, polluted streams, dying cattle, earth quakes, gas in private wells….but hey, who really cares, there’s a lot of money to be made. At some point in the future, perhaps not to distant, the “experts” will discover that a major aquifer has been polluted. Entire towns and cities will be left without water. Farms and ranches will be wiped out, food shortages will sweep the Nation. Perhaps then, the politicials will begin to pay attention to the seeds of destruction the oil companies are sowing. But of course, by then it will be to late, much to late. And unlike surface pollution, there will be no way to undo the damage.

    All of this could be avoided by moving to alternative sources of energy, but oil has the big bucks to keep that from happening. Will we ever learn in time? Very doubtful as long as money prevails over common sense, and the Congress is ruled by fools and lunatics.

    Loyst Streeter

  11. Jack B.
    October 31st, 2013 at 10:24 | #11

    How to we profit from this trend?

    Several technologies are being developed to utilize natural gas onsite to generate power or create value-added products, thus eliminating flaring. Given the global importance of reduced natural gas flaring, some of these technologies could be potential investment opportunities. The NDPA report cites the following technologies:

    • Onsite natural gas fired electrical generation

    • Fertilizer production from wellhead natural gas

    • Trucking of natural gas within North Dakota

    • Conversion of natural gas to liquid fuel

    • Small scale, onsite processing of the natural gas

  12. Robert in Canada
    October 31st, 2013 at 10:49 | #12

    @Loyst Streeter
    Loyst – Please watch the documentary FrackNation to find out the truth about fracking. It’s free to watch online, just google it.

    It provides verifiable proof that counters the un-verifiable propaganda that has been circulated by anti-fracking people who have ulterior motives.

  13. American D
    October 31st, 2013 at 15:54 | #13

    @Ann Coletta Doyle The oil and gas companies are constantly on the cutting edge with regards to technology and reclamation. Drilling and fracking are truly becoming cleaner and safer every day. FrackNation, a documentary on DVD, tells the truth about how amazing the shale revolution is for the USA. Domestic energy is a win-win.

  14. American D
    October 31st, 2013 at 15:59 | #14

    @Loyst Streeter Alternative sources? Such as? Wind turbines? They kill birds all day and produce tons of hazardous waste to build. Solar? Scam of the century takes taxpayer subsidies and goes Chapter 13 in two years. Plus, solar creates more hazardous waste during construction of the panel than does wind. Google RARE EARTH and see what I mean…Please thank God you live in the USA where your showers are hot and your A/C turns on for a relatively cheap price.

  15. November 12th, 2013 at 17:30 | #15

    The railways should be a stop gap or temporary method of transporting oil to the refineries but if oil cannot be processed at source and converted to LNG the only safe secure way is by barge traffic. Example Tampa Airport has been transporting Aviation fuel by Barge for as long as there has been an Airport located there. To my knowledge no serious accidents have ever happened using that method of transportation. Barge transportation has so many advantages. example being one million barrels of fuel can be transported in one container. by this method of moving product safely, This method of transporting hazardous materials is more environmentally safe, and is complimented by the huge waterways that exist in Canada and America.

  16. November 13th, 2013 at 01:32 | #16

    The unconventional fossil fuel extraction industry—in the U.S., primarily shale gas and tight oil—is expected to continue expanding dramatically in coming decades as conventionally recoverable reserves wane. At the global scale, a long-term domestic supply of natural gas is expected to yield environmental benefits over alternative sources of fossil energy. At the local level, however, the environmental impacts of shale gas and tight oil development may be significant. The development of technology, management practices, and regulatory policies that mitigate the associated environmental impacts of shale gas development is quickly becoming the next frontier in U.S. unconventional fossil resource extraction.

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