What the U.S. oil revival means for North America
New pipelines are needed; oil sands will be challenged
North America is set for a great revival in hydrocarbon liquids production. There are two pillars of growth. One is the Canadian oil sands – production has more than doubled over the past decade to 1.5 million barrels per day and is set to double again over the next 10 years. More unexpectedly and more dramatically, the second source of new supply is “tight” oil.
High quality, light oil that was once thought unrecoverable is being produced from fine-grained rock formations – using the same drilling and hydrofracturing technologies that proved to be game-changers in the North American gas industry – to such a degree that over the next decade, growth from North American “tight” oil is likely to surpass oil sands.
Others are recognizing the potential, too. In a report commissioned by United States Energy Secretary Steven Chu, the National Petroleum Council (NPC) noted that the potential for growth in Canadian and U.S. oil production is significant. American oil resources are proving to be much larger than previously thought, the NPC said.
“The North American oil resource base offers substantial supply for decades ahead and could help the United States reduce, but not eliminate, its requirements and costs for oil imported from outside of North America,” the industry-led advisory committee said. The NPC report concluded that unconventional oils, including oil sands and “tight” oil, are key components of future supply growth.
What are the implications of North American supply growth? One is the need to build pipelines. North American pipeline capacity is already lagging the growth in oil supply. A symptom of insufficient pipeline infrastructure is the price discount for landlocked U.S. and Canadian crudes, compared with similar quality grades traded on the world market.
The U.S. State Department exacerbated the pipeline shortage in January 2012 by rejecting TransCanada Corp.’s Keystone XL project. This creates some new uncertainty on future oil sands supply growth – or at least where it will be consumed and when. It’s still possible, pending a new application, that the $7-billion express route to the Gulf Coast could be in service by early 2015.
But the delay increases the probability that other pipeline solutions to bring oil sands and “tight” oil to new U.S. markets will move forward. The most prominent include Enbridge Inc.’s proposed Wrangler pipeline project, which, in combination with its proposed Flanagan South and existing Alberta Clipper pipelines, could bring oil sands barrels all the way from Canada to Texas. Another is the reversal of the Seaway pipeline. Over the next five years, all of these projects are required. With year-on-year growth in “tight” oil and oil sands expected, infrastructure will need to continually keep pace.
Another implication is more specific to the Canadian oil sands. Growth in “tight” oil, a light quality crude, diminishes the need for new upgrading facilities in Alberta. Why build new upgraders that produce synthetic crude oil if the U.S. light crude export market is shrinking?
Similarly, if U.S. Midwest refiners – currently the largest consumers of oil sands exports – can access growing volumes of light crude oils, they will be less inclined to make the large investments required to retool their refineries to consume Canadian heavy oil.
The great revival in North American hydrocarbon liquids production provides new opportunities – economic growth, jobs and enhanced supply security. But it is not without challenges. New pipeline infrastructure is needed to support changing patterns of supply and demand.
For the oil sands, there is growing pressure to access new markets, all the more so because growth in “tight” oil production makes investments in reconfiguring existing refineries to take heavy crudes less likely. At the same time, the U.S. export market for light quality crude is shrinking as domestic production of the stuff accelerates. These factors suggest the need for a pipeline to the elusive Gulf Coast, or to Asia, will become more urgent.