Even if prevailing prices fall significantly, it will be as difficult to slow the U.S. oil spigot as it has been for unconventional natural gas, which holds enormous implications for global energy markets, Citi analysts said in a new report.
Global Head of Commodities Edward Morse and a team of macro analysts issued a 96-page perspective on their near-term outlook for domestic oil and gas, "Energy 2020: Out of America, The Rapid Rise of the United States as a Global Energy Superpower."
"When it comes to crude oil and other hydrocarbons, the U.S. is bursting at the seams," analysts said. The debate may have intensified about exports, but "facts on the ground are mushrooming significantly faster than policymakers in Washington recognize or global markets are ready to realize."
The country already has become a "powerhouse as an exporter of finished petroleum products, natural gas liquids, 'other oils' including ethanol, and -- yes -- even crude oil -- with total gross exports expected to reach a combined 5 million b/d or more by the end of this year, up a stunning 4 million b/d since 2005."
By the middle of this year, combined hydrocarbon exports of 4.5 million b/d had pushed total oil exports to the top of the list of domestic exports by category, surpassing all agricultural products, capital goods and aircraft as the largest sector of U.S. export trade, according to Citi. Based on the data, analysts "fully expect that allowable exports of crude oil and condensates...will exceed 1 million b/d gross by early 2015 if not before.
"Exports to Eastern Canada are marching toward a half a million b/d, and we expect renewed exports from Alaska to grow to a higher, steadier state of above 100,000 b/d, for exports to Mexico to begin to materialize at least under an exchange program and to grow possibly to well over 200,000 b/d, 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 U.S. by both pipeline and rail to reach a similar level."
The oil import gap should be "totally closed well before the end of the decade," possibly by 2018 or 2019.
Meanwhile, supple U.S. gas supplies will lead to a market for liquefied natural gas (LNG) exports by the end of the decade that "should rival those of Qatar, the largest such exporter today, and pipeline exports to Mexico and Canada could be of the same magnitude, pitting the U.S. against Russia as the No. 1 or 2 natural gas-exporting country in the world," said Morse and his team.
Improvements on the unconventional gas side still are ongoing, analysts noted. Production could be more than 90 Bcf/d in 2020, up by almost half from 2011. For instance, technology has pulled production from the Appalachian Basin alone "from minimal levels to levels greater than most countries globally, falling short only of Russia and the U.S.”
The reserve size of shale gas, the associated gas from oil production and robust Canada gas output "are all supportive of continued North American natural gas and natural gas liquids production growth." From unconventional basins across the United States alone, if the pace of new reserve additions accelerated, reserves could account for more than 50% of the total domestic reserves by end of 2015, analysts estimated.
In addition, associated gas from oil and liquids producing wells could make up as much as 3 Bcf/d per year of the future production growth, and "it should remain strong as the U.S. ramps up oil production," said Morse and his team.
Analysts considered oil price scenarios in their deep dive, and they discussed recent concerns that Saudi Arabia might allow oil prices to fall enough to rein in U.S. oil growth. Despite the recent pullback in West Texas Intermediate (WTI), Citi analysts suggested that prices would have to fall to around $50/bbl to cause U.S. oil production growth to flatten.
"Full-cycle capital expenditures [capex] for shale production includes land, infrastructure and well costs (of which some 40-50% is from pumps, 10-15% for drilling rigs) and operating costs. In mature plays where the land grab is over and infrastructure is available, the remaining capex required (half-cycle costs) to bring on an additional well is far lower than areas requiring full-cycle costs.
"Full-cycle costs might be as high as $70-80/bbl WTI, but half-cycle costs could be as low as the high $30s-range. Thus, those fringe and emerging areas requiring full-cycle capex could now face a reassessment, while established areas should continue drilling and growing output."
The U.S. government inevitably has to respond to growing pressures on exports. However, the debates on lifting various bans on exports are misplaced, according to the Citi analysts. They don't see a "big debate," but rather a "piecemeal, ad hoc set of decisions facilitating exports incrementally, with the sum of the increments reaching very high levels."
The 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. How this process unfolds is sure to create new winners and losers even as it remakes the global energy landscape."