BY ED MORSE
The big question about America’s energy boom is not how much it will produce, but how much it can export.
When it comes to crude oil and other hydrocarbons, the United States is bursting at the seams. The United States has very rapidly become a powerhouse as an exporter of finished petroleum products, natural gas liquids, other oils including ethanol, and even crude oil — with total gross exports of all of these combined expected to reach 5 million barrels per day (mb/d) or more by the end of this year, up a stunning 4 mb/d since 2005. Total oil exports in 2014 pushed the commodity to the top of the list of U.S. exports by category, far surpassing all agricultural products, capital goods, even aircraft as the largest sector of U.S. export trade. Meanwhile, U.S. crude oil exports, largely to Canada, are 500 percent above what they were a year before, and are heading for around 500,000 b/d by year end.
This remarkable boom is unlikely to stop even if prevailing prices for oil fall as low as $50. Indeed, even if light sweet crude (WTI) prices fell below $75 for a while, production growth would continue at relatively high levels for years to come. While the debate in the United States intensifies over whether the country should lift restrictions dating back to the 1970s on exporting crude oil, facts on the ground are changing faster than policymakers in Washington recognize — or global markets are ready to realize. As U.S. hydrocarbon trade flows get turned on their head, oil exporter countries lose their largest market, and face greater competition in the rest of the world. The global impact on energy prices, global trade and investment flows, petrostate revenues and political stability, and economic boosts to net importer countries and consumers are resulting in broad economic and geopolitical shifts that are beginning to ripple through the world.
By late 2014, every barrel of locally produced petroleum product and crude oil — as well as the yet-to-be-legally-defined category of condensate (chemically, a form of ultra-light crude oil) — that can get out of the country is, in fact, getting out. Too much attention has been placed on whether to lift the “ban” on crude oil exports. Only a limited ban effectively impacts oil produced in federal waters or transported through a federally mandated pipeline; elsewhere, there is a minefield of obstacles to exporting crude oil from the United States — but a fairly permissive regulatory framework that already applies to Canada, is likely to be applied within a year to Mexico (and soon thereafter to some free trade agreement partners), even without legislation to lift the bans.
Allowable exports of crude oil and condensates will exceed 1 mb/d gross by early 2015, if not before. Exports to Eastern Canada are marching toward a half a million barrels a day, and we can expect a return to exports out of Alaska, which could grow to a higher, steadier state of above 100,000 b/d. We can expect exports to Mexico to begin to materialize at least under an exchange program and to grow possibly to well over 200,000 b/d, and for allowable exports of processed condensate to reach 200,000 b/d or more before long, and for re-exports of Canadian crude oil entering the United States by both pipeline and rail to reach a similar level. Already the U.S. exports around 400,000 b/d, which is more crude oil than OPEC member Ecuador, although the U.S. still imports around 7 mb/d, and thus remains a net importer of crude oil. For now.
The United States has reduced its net oil imports (that is, net imports of crude oil and petroleum products combined) by a stunning 8.7 mb/d over a very short period of time — that’s more than the total production of any country in the world other than the United States, Russia, and Saudi Arabia. Just eight years ago, in August 2006, the United States imported, net, a little over 13.4 mb/d of crude and products; by the middle of 2014, that had fallen to 4.7 mb/d.
We can expect that the oil import gap will be totally closed well before the end of the decade, possibly by 2019 if not by 2018, at which time the United States should become a net exporter of crude oil and petroleum products combined. But that doesn’t mean that obstacles have been overcome.
Since the start of the ramp-up of Canadian and then later U.S. production there has been a lag in infrastructure to get new production to domestic markets and product and crude oil to foreign markets. An enormous build-out of rail transportation for crude has resulted, bringing oil to pipelines, refineries, and ports both within the United States and from Canada to the United States. Combined volumes have grown dramatically since 2010, rising from less than 50,000 b/d to nearly 1 mb/d at the end of 2013. Despite the fact that pipeline transportation is far more efficient than transportation by rail, barge, and truck, adequate investments are not being made in broad pipeline infrastructure to keep up with the rate of growth of U.S. oil production. The North American rail system in particular is becoming congested and, after some major accidents, safety measures for rail transportation of crude oil are being hotly debated.
The lag in pipeline infrastructure is part of a big chicken-and-egg problem. Most of the rail transportation comes from the Bakken shale formation in North Dakota where some 70 percent of production is shipped by rail, mostly to the East and West Coasts. Refiners on the U.S. Gulf Coast do not need light sweet crude and indeed have a superabundance of it locally in the Eagle Ford and Permian Basin in Texas. But refiners on the two coasts are fearful that, if they commit to use pipelines to transport the crude oil they need, they could end up in an unfavorable position economically if the United States were to ease restrictions of exports. Similarly, companies and investors are unwilling to commit to build new refinery capacity lest Washington lift the export restrictions, impacting their feedstock costs.
Export capacity is constrained both because of congestion in the U.S. Gulf of Mexico harbors and because of lack of investment, which itself is being held back because of uncertainty related to export restrictions. So even if U.S. export restrictions were to be relaxed significantly it could take years to get the infrastructure in place.
In the end, there remains an inevitable day of reckoning when U.S. crude production cannot escape its North American confines, pushing down domestic crude oil prices and endangering production, without widely liberalized exports. That day may be coming sooner than people expect, perhaps before the end of 2015. Meanwhile outcomes for production and export levels make a big difference — to the trade balance and to energy-intensive industries like fertilizers, petrochemicals, and processed metals.
The U.S. government will inevitably need to respond to growing pressures to export crude oil. But the debates in Washington on whether to lift the various bans on exports of crude oil and condensate are misplaced. A set of big debates in Congress or in the Obama administration to quickly settle issues related to changing the legislation on exports is not soon coming. By law, exports of crude oil produced in federal waters or from federal lands are banned, with some notable exceptions like exports from Alaska, exports of heavy oil in California, or exports to Canada. It is unlikely that either of these laws will be changed any time soon. Other exports are placed on the Export Administration’s short supply control list, which restricts exports of a few specific commodities; in addition to crude oil there are only two other commodities that are restricted from exports: unprocessed Western red cedar and horses exported by sea (but not by truck, train, or airplane).
What is most likely is the unfolding of a piecemeal, ad hoc set of decisions facilitating exports incrementally, with the sum of the increments reaching very high levels.
There is unlikely to be a sudden change in the restrictive framework that limits crude oil exports from the United States. But progressive change is highly likely. The special conditions which now allow a significant volume of exports to Canada are undoubtedly being extended to Mexico. Other Free Trade Agreement partners, including especially Chile, Israel, Singapore, and South Korea are likely to petition for similar status. Eventually, restrictions on condensate exports, already reduced by recent decisions to allow processed condensate for export, are likely to be further eliminated with the development of a clear definition of what constitutes condensates. Meanwhile, exports from Alaska are likely to continue to grow in volume. The re-export of imported crude oil from Canada is also expected to grow significantly, soon to 200,000 b/d and later to perhaps twice that level.
All of these details matter because they are shaping the emergence of North America as an energy superpower that is poised to usher in disruptive changes to global oil markets, trade, and investment. And how this process unfolds is sure to create new winners and losers as it remakes the global energy landscape.
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