The Next Frontier
Expanding Crude Oil Exports to Enhance Canada, U.S. Energy Industries
North America has turned into a juggernaut of oil and gas production in the last decade. However, the recent drop in global oil prices has stalled industry growth in the continent’s top two producers. To keep the industry strong, U.S. and Canadian companies are pushing to increase exports and open up new markets for producers.
While the United States and Canada share a common goal of increasing oil and gas exports, each country faces its own challenges in doing so.
In the United States alone, crude oil production last year experienced its highest volume increase since recordkeeping began in 1900, according to data released March 30 by the U.S. Energy Information Administration (EIA). At 8.7 million barrels per day (bpd), production increased by 1.2 million bpd in 2014 or 16.2 percent, marking the highest percentage growth rate since 1940. The majority of last year’s increase came from tight oil plays in North Dakota, Texas and New Mexico, where hydraulic fracturing and horizontal drilling were used to produce oil from shale formations.
Crude oil production in the United States has increased in each of the last six years, but that growth is slowing. Although oil production is expected to rise in 2015 and again in 2016, the EIA expects that growth will not be as strong as in 2014 because of the drop in oil prices since last summer. The EIA predicts annual crude oil production will grow at a slower rate of 8.1 percent this year and 1.5 percent next year, with production between December 2014 and December 2015 forecast to rise by just 200,000 bpd.
Meanwhile oil and gas industry groups are pressuring Congress to repeal a 1970s-era ban on crude oil exports, which restricts U.S. producers from accessing the global market. Unleashing U.S. crude oil on the global market would ensure continued growth in the industry, according to Carlos Pascual, senior vice president at the global energy information and consultant firm IHS.
“Low oil prices today are affecting capital expenditures around the world, which will affect U.S. and global production in the next 18 months,” Pascual said during his March 19 testimony on U.S. crude oil export policy before the Senate Committee on Energy and Natural Resources. “For the U.S. to create the incentives to recapture or sustain the dynamism, innovation and security inherent in its energy revolution, it should give its American energy producers the widest market to sell their products.”
Canadian crude exported from U.S. facilities is among a few exemptions from the ban.
In Canada, the oil and gas industry is pursuing efforts to expand infrastructure in all directions to increase exports and diversify the markets it serves. Demand to increase transportation capacity in the country remains strong despite the sharp oil price decline and intended cuts in capital spending, according to the Canadian Association of Petroleum Producers (CAPP), which released a short-term review of industry forecasts in January. The association estimates a 33 percent decline in short-term capital spending in 2015 and a projected slowdown in growth of oil production from its prior forecast by about 65,000 bpd in 2015 and 120,000 bpd in 2016.
“No question, the effects on the industry are sharp, but we continue to need all forms of transportation in all directions — pipelines in particular — as our industry continues to grow in the years ahead,” said CAPP president Tim McMillan in a Jan. 21 statement.
Exporting oil and gas has always been a major part of the Canadian economy, with the United States as its biggest customer, according to Greg Stringham, vice president of oil sands, transportation and markets at CAPP. However, as U.S. production has grown, so has the need to for Canadian producers to find new customers in Asia and Europe.
The demand for exports in the United States is a more recent phenomenon, but no less critical to the industry, according to Peter Lidiak, pipeline director at the American Petroleum Institute (API). Expanding exports would help stabilize the industry by allowing domestic producers to find a better price on the global market for the light crude produced in the United States.
Removing Barriers
Oil and gas exports would drive pipeline construction in Canada. But in the United States, exports would spur continued production growth, with incremental pipeline expansion in underserved regions like the Bakken.
To increase oil and gas exports, U.S. and Canadian industry stakeholders face similar challenges in terms of clearing regulatory hurdles and engaging the public. However, the U.S. ban on crude oil exports is an extra-high hurdle for the industry to clear.
The export ban was put in place during the global oil crisis in the 1970s. At the time, it made sense, Lidiak says, but no longer.
“There was a world shortage, so they did not allow domestic crude to be exported,” he says. “It’s time for those restrictions to be lifted, as the domestic energy picture is much different today than when the ban was put in place.”
While U.S. oil production has skyrocketed in the last six years, the crude is of a lighter variety than what domestic refineries are optimized to handle, Lidiak says. As a result, domestic storage is reaching capacity and production is constrained with no outlet.
“In a short amount of time, with the removal of the export ban, the United States could have a net export of 2
million bpd,” says Lidiak, adding that U.S. producers could “put that lighter crude into the global market, but still import the heavier crude needed for refineries here.”
Another challenge for both U.S. and Canadian efforts to increase export capacity is the permitting process, especially now that public interest has placed many pipelines and other infrastructure expansion projects in the spotlight.
“As we’ve seen with the Keystone XL project and others getting more public attention, the permitting processes for oil and gas pipelines are taking longer,” Lidiak says. “Ultimately, I believe these projects will move forward, but it will just take more time.”
Stringham agrees, adding that local concerns have come to the forefront of the approval process for these projects, due in large part because pipelines and facilities are being built in new supply areas where residents are less accustomed to the industry.
“Local concerns have to be addressed up front before the pipe goes in the ground,” Stringham says. “In areas where these projects have not been seen, residents need more explanation. The people along the route need to know it’s safe. Now, there is a lot of upfront work to understand safety. The public wants to know what’s in it for them in particular, such as jobs and other ways they will share in the benefit.”
Stabilizing the Market
The dramatic drop in oil prices has brought “a lot of uncertainty now” in the oil and gas sector, Stringham says. How this turmoil affects the industry over the next year is still unknown.
“We will have a better understanding by the end of May, but for now we’re seeing a slower pace of growth. It depends on the length of the price downturn and how high it rebounds. It has cut investment and it is stopping development in the midstream as companies wait to see how long it will last. It will be a question over the next year.”
However, Lidiak believes expanding oil and gas exports will bring some stability to the global market. He adds that having access to the international market will boost the incentive to produce more crude.
“More importantly, exports will allow the United States to ease currently constrained production of light crude oil, which is not as favorable for use in domestic refineries,” Lidiak says. “Putting that onto the world market brings parity to the price producers can get for that lighter crude. It becomes an outlet for that product.”
Filling Capacity
In the United States, exporting oil and natural gas would optimize pipeline capacity usage, rather than drive significant new installations, Lidiak says. Record production increases over the past six years have already spurred a number of major pipeline projects in recent years, some of which are still in development.
“There is some pent up capacity that is on the planning board now, such as Keystone XL, which is planned but not yet approved and will bring online a significant amount of capacity to move Canadian and U.S. crude to the Gulf Coast,” Lidiak says. “Presuming that goes forward and presuming some of the expansion projects that Enbridge and other companies have proposed to move crude south, those pipelines will meet a lot of the forecasted demand, at least in the near future.”
While there will be pipeline projects built in underserved areas like the Bakken and elsewhere that capacity shortfalls exist, Lidiak doesn’t foresee a significant number to be built if exporting U.S. crude is allowed. However, there is one area where exports will drive growth.
“Where we might see an increase is in the production areas,” he says. “Exports would demand more production, and there we may see more gathering and regional pipelines built.”
Lidiak adds that there is a similar situation regarding natural gas exports and related infrastructure. Many of the existing natural gas plants in the United States were built for imports, and the pipelines in place were designed to move product from the import facilities into the U.S. market. Instead of building new pipelines for export, he says companies will look to switch direction of flow.
Any gas pipelines that will be built will likely address capacity constraints, such as in the Northeast where natural gas is increasingly used for power generation. By and large, Lidiak expects no significant increases in natural gas transmission pipeline mileage.
Pipelines for Export
Increasing Canadian energy exports would be a major driver in new pipeline construction, Stringham says, noting that Canada already has 70 pipelines — Keystone XL would be the 71st — to carry oil and gas to its No. 1 customer, the United States.
“Canada has always been a nation that exported its energy resources,” Stringham says. “We’ve grown up with that, and now the United States is looking to export more. It’s an important part of our economy.”
The increase in U.S. production has changed the dynamic and means that “Canada must look to diversify,” Stringham says. In addition to building pipelines south, companies are pursuing projects to move oil and gas east and west to supply Canadian markets that are not currently connected to the country’s pipeline network, as well as for export to overseas markets.
“Like President Obama said, we’re looking at an ‘all of the above’ strategy,” he adds.
Although crude oil is Canada’s primary export commodity, its natural gas sector is also on the rise.
“We have seen a surge in the development of tight gas, both in Canada and the United States, where demand is filled by supplies closer to the market,” Stringham says. “That has caused Canadian producers to re-evaluate the markets they’re serving.”
The primary markets remain Canada and the United States, but Stringham says the conversion of coal-fired power plants to burn natural gas offers “big potential” for producers. Crude producers in the Alberta oil sands also consume large quantities of natural gas. And beyond North American borders, Asian and European markets are another attractive destination, especially for liquefied natural gas (LNG).
“There has been a push to move into the Asian market, but also a pull from Asian investment,” Stringham explains. “There has also been a lot of demand from Europe, where there is fear of disruptions from turmoil in the Middle
East, Syria, Greece, Russia and other places. Canada is a reliable and stable source.”
While Canada does not yet have the required facilities to meet global demand, Stringham says export opportunities will require more pipelines to be built.
“Every one of these exports will need a pipeline,” Stringham says. “While rail has become a popular method of transporting crude, it’s not a long-term solution. The downturn in oil prices is slowing some of the growth, but we still need additional pipelines, whether it’s that 71st pipeline to the United States or projects to the move crude east and west. Continued pipeline development is quite vital in the longer term.”
