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Shale Boom Prompts Calls for Expanded US Oil and Gas Exports

By Global Risk Insights | Tue, 21 January 2014 22:53 | 0

Early in January, the head of the influential energy lobby American Petroleum Institute (API) made a strong call for the US to become a global energy producer by capitalizing on the recent shale oil boom. In his speech, API President Jack Gerard argued for a reevaluation of the current limitation on the exports of US crude and for a full expansion of LNG exports.

That same day, US Senator Lisa Murkowski (R-AK) spoke in favor of ending the export ban. Only a few days later, Chamber of Commerce President Tom Donohue argued that the recent energy gains were “an unrivaled opportunity” to transform the US into a significant exporter.

This new groundswell of support at the start of 2014 is particularly notable because of the midterm elections in November. Interest groups like the Chamber of Commerce have promised heavy support for pro-business candidates and this issue figures to feature prominently.

In the 1970s, oil prices skyrocketed following an embargo by oil-producing Middle East countries. Seeking to curb the exposure of the US to foreign markets, the US limited the export of crude oil to try to conserve domestic oil. Currently, there are some exceptions to the rule, such as through the Trans-Alaskan pipeline, but total exports were only 67,000 barrels per day in 2011.

Related article: Some of the More Interesting Points to Take from BP’s Energy Outlook

Now, with tight oil deposits from shale formations being tapped in states like North Dakota, US oil production has jumped considerably as imports have slumped. A study by the Peterson Institute noted, “by the end of 2012, net imports as a share of US oil consumption had fallen below 40 percent – levels not seen since the early 1990s.”

From 2008 to 2012, 1.2 million barrels per day were added to US oil production capacity in addition to another half a million equivalent barrels per day in LNG. This surge has led to a 60% increase in the amount of capital spending on energy infrastructure over the last four years, according to IHS Global.

Despite this, only five applications to export LNG to non-free trade agreement nations have been approved by the Department of Energy. Many others are still awaiting approval (API has a useful map of proposed LNG exports terminals).

In the eyes of American businesses, the administration is unnecessarily holding up the permission process, thereby slowing the process of retooling LNG facilities from imports to exports. However, Energy Secretary Ernest Moniz recently told reporters that “there are lots of issues in the energy space that deserve some new analysis”, citing the changes since the 1970s. Many have interpreted this to indicate the ban on the export of US crude is loosening, and it might indicate an attitude more responsive to approving LNG exports as well.

Related article: Oil Glut Threatens US Shale Revolution

However, the nation’s energy infrastructure has been built on the premise of a slowly declining domestic energy sector and on bringing imports from the coast into the interior. Retooling the system to bring energy resources from the middle of the country out to refineries on the coast is not as easy as turning a switch.

The jump in supply has created bottlenecks at processing centers and a gap has opened up between the price of US oil and world benchmarks (for instance between the West Texas Intermediate grade and Brent). In addition, US refineries are better equipped to deal with consistency of crude from the Middle East — US crude is much lighter than the heavier Middle Eastern grade.

This has created a twofold problem where an oversupply has lowered the local price and transportation/exporting laws prevent the excess from being moved to other areas of the country or sold to other nations.

In the long term, a permanent spread between US oil grades and global prices could lower the incentive to invest. A prolonged slump in the WTI price versus Brent or other benchmarks could make infrastructure projects too costly to justify the investment.

IHS Global forecasts that over the next twelve years, $890 billion will be invested in oil and gas systems. If the US is serious about becoming an energy exporter, it will need to find ways to continue to make that infrastructure investment profitable. However, some urge caution over concerns that opening up exports would raise the price for US consumers and make energy self-sufficiency harder to achieve.

By. Ned Pagliarulo

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