North America’s burgeoning unconventional oil supplies have created “considerable investment needs” because pipelines are in the “wrong place carrying crude in the wrong direction and/or transporting the wrong products,” according to a review by Ernst & Young LLP.
“Infrastructure mismatches” from growing crude supplies in the United States and Canada “have created significant logistics constraints” and bottlenecks, which are “clearly reflected in the price disconnects in the Midwestern region over the last 18 months,” according to a quarterly report by the U.S. Oil & Gas arm of the consultancy.
“The magnitude of the problem is much greater than reversing one pipeline,” said Ernst & Young’s Marcela Donadio, Americas Oil and Gas Leader. “Not only do we need more infrastructure, we need different infrastructure.”
The domestic crude pipeline network primarily was designed to move supplies north from the Gulf Coast, the consultants noted. A lot of talk has been centered on pipe “dislocations” because of the crude oil oversupply at Cushing, OK, the delivery point for West Texas Intermediate (WTI), but “getting supplies out more broadly across the country is also crucial. Supplies from the U.S. Midcontinent and Canada need diverse infrastructure to reach areas of demand.”
Globally, the oil supply/demand balance “continues to be uneasy” because of tensions between Iran and the West, as well as “economic weakness and uncertainty,” said the report. “In the U.S., rising new supplies of tight oil continue to put pressure on WTI and Canadian oil prices. Going forward, oil markets appear to remain skittish; with demand growth dependent on the economic recovery and geopolitical risk still high.”
Meanwhile, U.S. natural gas storage volumes “remain high with no relief in sight,” said the Ernst & Young team. New liquefied natural gas (LNG) supplies from the eastern Mediterranean area and eastern Africa, along with “expected export capacity” from North America, “are likely to result in significant shifts in long-term global supply/demand fundamentals. The booming Australian LNG sector will be the most pressured by the new supplies.”
In the downstream arena, the “big challenge” for the refining industry in the United States and Europe is the rise of “zombie refineries,” noted consultants.
“Just when it appeared that some of the surplus capacity may be permanently shut down, improving margins for other refiners, the uneconomical plants live on. The expected East Coast product deficits are now less likely to happen after the announced sale of refineries on the East Coast and Aruba,” said the report.
The oil and natural gas rig count “across all geographies” is holding steady, noted the consultants. The strongest growth now is in Africa and the Middle East.
“Cost pressures are slowing somewhat across all services, including labor and materials, increasing roughly at a general inflation rate of about 2-3%. Global upstream spending is still increasing, but growth is decelerating. Upstream spending is expected to be up 10-15% in 2012. In North America, operators are continuing to redirect capital expenditure from dry gas plays to oil and/or liquids-rich areas.”
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