[Editor's note: A version of this story appears in the October 2018 edition of Oil and Gas Investor. Subscribe to the magazine here.]
U.S. shale has developed at a breathtaking pace, yet we see the revolution still ongoing. Prices are recovering and benchmark differentials have reappeared. Hot money is chasing all manner of investments. Energy output is flowing from new U.S. supply regions. Refineries utilization is above 99%-plus. Exports are traveling from high-capacity offshore gateway Gulf Coast terminals to new global demand centers. Even Exxon Mobil Corp. (NYSE: XOM) is reintegrating across the Texas energy patch to produce, pipe, refine and export Permian Basin crude.
Looking back a few years gives perspective on the dynamic outlook for today and tomorrow. U.S. field crude production rose from 6 million barrels per day (MMbbl/d) in 2011 to 10.4 MMbbl/d in May 2018. Supply in certain weeks of 2018 climbed to 11 MMbbl/d. How did and will the industry monetize such strong supply gains?
Stratas Advisors’ 2012 multi-client “Refining Unconventional Oil” research report analyzed upstream dynamics in a downstream context. Then, the press was crowing about 4 MMbbl/d of light oil refinery investment. Today, with the new construction gains and stealthier gains realized with higher utilization after netting out losses from shutdowns of noncompetitive refineries, Stratas sees light oil refineries having consumed about 2.1 MMbbl/d of the incremental shale supply. Why did the U.S. market navigate the gap between supply and demand? It’s because of exports.
U.S. crude exports monetized the 2 MMbbl/d surplus gain of shale crude production over refinery runs that otherwise would have existentially threatened upstream economics. Exports came about after U.S. authorities recognized that U.S. shale has ushered in an era of abundance rather than the decades of shortage begun in the 1970s energy crisis. Outdated federal export prohibitions were lifted since 2016 to allow offshore U.S. crude exports. The latest Energy Information Administration (EIA) monthly data show that U.S. crude exports rose to 2 MMbbl/d in May, just as refined product exports also incrementally expanded by 2.4 MMbbl/d.
Investments in upstream production and midstream infrastructure have driven striking trade developments. In Stratas’ 2012 report, nearly 100 clients saw that the firm expected U.S. shale supply to back out Gulf Coast light crude imports. Yet we didn’t expect the speed of that happening. Since late 2016, U.S. light crude exports have been offsetting imports.
And for several weeks of 2018, crude exports topped 3 MMbbl/d. Canada was the greatest U.S. crude importer in 2017, yet China and India in 2018 have newly joined the leaderboard. Looking ahead, Stratas expects more of the same. U.S. crude exports in the next decade may double and peak at about 4.5 to 5 MMbbl/d amid enduring price discounts to global grades.
That’s because resources and available acreage within the productive oil-rich shale plays (Permian, Eagle Ford, Rockies, Midcontinent and Bakken) should attract capital and incrementally add 1to 2 MMbbl/d of light field crude production growth. On top of productive upstream investment, midstream investment will be needed to move crude to U.S. refiners and new very large crude carriers export-oriented terminals off Texas and Louisiana shorelines capable of operating at high capacity and low per-barrel costs.
Incremental crude production will drive refinery expansion nationally and beyond (Limetree Bay in USVI, ExxonMobil in Beaumont, Pemex in Mexico, etc.). More refining will enable fuel export gains roughly equivalent to and crude exports gains.
Next decade, Stratas expects the U.S. to become a net petroleum exporter. During the past three months, EIA data show U.S. petroleum imports averaged 10.1 MMbbl/ while exports averaged 7.45 MMbbl/d. Meaning, the U.S net import totaled just 2.7 MMbbl/d. U.S. national net export status is that close.
The firm sees a path toward the net export milestone that involves cutting 1 MMbbl/d of net crude imports either through more light crude exports or less heavy sour imports coupled with a 1.7 MMbbl/d step up in refined petroleum exports (fuel and NGL). Natural gas exports via pipeline or LNG carrier will cover gaps if petroleum exports fall short.
Fullstream energy investment, operations and exports have rapidly and shockingly allowed the U.S. to nearly become a net energy exporter while providing almost fully for its internal energy consumption.
Greg Haas can be reached at ghaas@stratasadvisors.com.
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