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