In 2005, I was at a meeting of energy experts close to Dominion Energy Inc.’s (D) liquefied natural energy (LNG) terminal in Cove Point, Maryland.
At the meeting, it was unanimously concluded that at least 15 percent of U.S. natural gas demand would be met by LNG imports within the next decade.
In those days, nearly 70 percent of the U.S crude demand was projected to be met by imports.
At that time, American oil production was not even 7 million barrels a day with well over 60 percent of total volume coming from “stripper wells” – each providing less than 10 barrels daily but many more barrels of water than oil.
Back then, we were aware of the potential lurking in shale and tight oil and gas…
But nobody could have foreseen (myself included) the largesse LNG would provide.
Well, a great deal has changed since then…
On Wednesday, the U.S. Department of Energy reported that the U.S. would become a net exporter of crude oil and natural gas by 2022, which would mark the first year that U.S. energy exports surpassed imports since 1957, when Dwight Eisenhower was president.
And that is a very big deal.
The Energy Market’s Dramatic Transformation
Understanding why the U.S. is on pace to export more energy than it imports boils down to two events that have dramatically transformed export prospects.
The first being when lawmakers ended the 40-year ban on U.S. oil exports back in December 2015.
At the time, excess supply was wreaking havoc on the energy sector as a whole. There was just too much American oil sitting around in storage, with no one around to buy it.
The second event was the LNG Revolution.
The growth in U.S. LNG exports has dramatically transformed the global energy markets.
As I said above, just over a decade ago, the U.S. was expected to become a growing LNG importer, not exporter – likely to be dependent on Russian, Middle Eastern, and North African gas.
Instead, the U.S. has quickly become a dominant force in the LNG market by offering cheaper and more flexible cargos, and by being a more politically palpable supplier.
Fact is, both of these events have significant implications for investors because they bring into focus some companies likely to profit – a trend that should be continuing for some time.
America’s Energy Dominance
The crude export totals coming out of the U.S. have been nothing short of staggering.
Even during the “prohibition” period, there were still some exceptions for low-grade oil (not having a sufficient domestic market) and a few consignments designated as tolling (moving raw material out in return for refined product coming back in).
But the overall amount was quite low.
Today, an amount approaching 2 million barrels a day is leaving the US, bound for higher-priced markets abroad.
Exports are becoming capped only by the limits in port infrastructure and tanker availability.
For some time, U.S. refineries have already been global leaders in exporting finished products such as gasoline, diesel, low-sulfur heating fuel, high-grade kerosene (i.e., jet fuel).
These days, crude imports are basically happening to allow end-users (the refineries) to exploit cost differences, thereby improving the refinery margin.
That margin is the essential indicator of profits; it is the difference between what it costs the plant to manufacture the product (the largest ingredient being the cost of oil) and the revenue received at the first wholesale transaction point (still carrying the traditional title of “rack price”).
The LNG market is the other major mover.
The LNG Revolution
LNG is natural gas that has been liquefied at extremely low temperatures to make it easier to store and transport.
And until late last year, the U.S. provided no volume to the world market.
In fact, the U.S. only started to export LNG overseas in February 2016 when the first liquefaction train at the Sabine Pass terminal in Louisiana opened.
Until that, the only natural gas exports were via pipeline to Mexico.
Fast forward to today and current estimates have U.S. exports will provide at least 6-8 percent of the world’s supply by 2020.
These exports of crude oil and LNG are already providing support for increasing field production without adversely impacting market price.
They are likewise affording some leverage in U.S. relations with other producers worldwide, especially OPEC, and Russia.
Coal, the last of the three fossil fuels, has been a net exporting source for a while now.
The EIA says that will continue to be the case at last until 2050.
However, increases in the export volume will be mitigated by other sources being more local to the markets comprising the principal centers of rising demand, especially Asia.
Also, American shipping facilities are reaching capacity.
As a result, the EIA calculates that U.S. production of oil and natural gas will continue to grow through 2040 and beyond.
But the most striking factor to consider is oil.
America the “Oil King”
Almost 13 years ago, that Cove Point meeting was expecting daily oil production to come in at about 6.8 million barrels.
Today, it is more than 10 million barrels, and the EIA believes it will reach 11.2 million by 2022.
That surging output should allow the U.S. to dethrone Russia and Saudi Arabia as the world’s leading crude oil producer – a title that it hasn’t had since 1975.
(Click to enlarge)
As for demand, the EIA also sees consumption growing steadily over the next two years, with global demand rising by an average of 1.7 million bpd in both 2018 and 2019.
“What we see is a result of the shale revolution,” International Energy Agency chief Fatih Birol recently told the Senate Energy and Resources Committee. “The U.S. is becoming the undisputed leader of oil and gas production worldwide.”
Birol went on to say that the increases in the U.S. reminded him of Saudi Arabia’s meteoric rise nearly five decades ago…
“We have seen such a big growth in the history of oil only once, four and a half decades ago when Saudi Arabia expanded their very famous Gawar oil field,” Birol said. “It is the biggest oil field in the world.”
Should the U.S. overtake Russia and Saudi Arabia, it will usher in a new era of energy production…
Not to mention a new era of energy profits for us to target.
By Dr. Kent Moors
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