Robust natural gas and oil supply growth has the potential by 2020 to “radically reindustrialize” the United States and Canada and create “the New Middle East,” as long as politics don’t get in the way, according to an indepth report prepared by the energy team at Citigroup Global Markets Inc.

Edward L. Morse, the global head of commodities research, shared a microphone with the research team during a conference call Thursday morning to discuss the firm’s 92-page report, “Energy 2020: North America, the New Middle East?,” which was issued to clients Wednesday. The report was “intentionally provocatively” titled, he said, “because of what could happen over the next decade if forces were unleashed and politics didn’t slow things down.”

U.S. output growth now centers on tight formations, i.e. shale, but it also is growing from other oil sources more robustly than any other country in the world, the analyst team noted. Total liquids output was about 7.3 million b/d in 2009, 7.5 million b/d in 2010 ,and 8.8 million b/d in 2011.

According to the Citigroup analysts, five incremental sources of liquids growth could make North America the largest source of new global energy supply over the coming decade:

“Putting these together, North America as a whole could add over 11 million b/d of liquids, from over 15 million b/d in 2010 to almost 27 million b/d by 2020-2022,” said the analysts.

Citigroup’s Bob Morris, who discussed oil and gas exploration and production during the conference call, said “supply in the Lower 48 and Canada is likely building faster than the logistics system and we don’t see any any point in time in this decade when it will be met by logistics…when it will be larger than supply growth…These kinds of distortions occur in the market and those relationships will continue…

“Changes will be volatile, there will be surges in debottlenecking capacity, and distortions are likely to remain…unless there is a change in the political system in the United States, in attitudes and restrictions on exports on oil and gas from federal lands, or hydrocarbons shipped by the federal government.”

The shale gas revolution first propelled fundamental changes in the U.S. gas markets, and it has begun to transform other sectors, including power generation and transportation, the Citigroup analysts noted.

“Other incremental gains could come from LNG [liquefied natural gas] exports with North America acting as the swing supplier for the world. but the most momentous change looks likely to be in the reindustrialization of America based on dramatically lower cost feedstock than is available anywhere in the world, with the possible exception of Qatar.”

North America’s deepwater has been somewhat overlooked in the onshore hoopla, but Citigroup’s analyst team said it could outshine unconventionals in the end.

Before the Macondo well blowout two years in the GOM, the United States was holding what many analysts considered to be a “permanent one-third share” of the world’s deepwater resources, the Citigroup analysts noted. With production now returning, it “looks to resume growth by 2013 before then accelerating, replacing depleted output of some 500,000 b/d and adding another 2 million b/d by 2020.” Projects under development and probable projects should drive GOM growth to 2 million boe/d by 2015 — with those already under development or onstream totaling 1.8 million boe/d.

“Together, this implies over 280,000 boe/d of growth every year from 2014 onwards; adding upside potential sees growth accelerating toward the end of the decade.”

Total GOM output currently includes 3 Bcf/d or more of gas production, or around 500,000-600,000 boe/d, “but this is expected to fall, as newer developments tend to have lower gas-to-oil ratios,” the analysts noted.

Big growth additions from the deepwater GOM now include Atlantis, Perdido, Shenzi, Silvertip, Tahiti and Thunder Horse, while large fields scheduled to come online in 2014-2016 include Big Foot, Gunflint, Hadrian, Jack, Knotty Head, Lucius, Moccasin, St. Malo, Stones, Tubular Bells and Vito. Tiber, Buckskin, Kaskida, Appomattox and Heidelberg fields also should provide “probable” volumes in the coming years, said the Citigroup analysts.

“These new fields may be riskier, due to geological and technological changes, but have significant upside in volume and value. The probables hold an estimated 4.2 billion boe in recoverable reserves — around a third of current deepwater commercial reserves in the Gulf of Mexico — and are located in frontier and emerging plays.”

The deepwater fields benefit from large field sizes — hence economies of scale, but they are pre-salt or ultra-deep, which makes them challenging to drill and costly. They also require more pipeline infrastructure than in established areas. However, technological improvements are expected to change that outlook.

Both onshore and offshore, “regulatory factors remain the largest constraint,” said the Citigroup team. The analysts noted that BP plc, Chevron Corp., ExxonMobil Corp., Petroleos Brasilerio SA (Petrobras) and Royal Dutch Shell plc, which hold the majority of the GOM reserves, “are most acutely restrained by permitting and licensing rather than the willingness to invest. That these are already easing is a positive sign and drive our potential upside projections going forward.”

The “economic consequences” from booming North American energy supplies are “potentially extraordinary,” said the Citigroup analysts.

“We estimate that the cumulative impact of new production, reduced consumption and associated activity may increase real GDP [gross domestic product] by 2.0-3.3%, or $370-624 billion (in 2005 dollars) respectively. Of this amount, $274 billion comes directly from the output of new hydrocarbon production alone, while the rest is generated by multiplier effects as the surge in economic activity drives higher wealth, spending, consumption and investment effects that ripple through the economy. This potential reindustrialization of the US economy is both profound and timely, occurring as the U.S. struggles to shake off the lingering effects of the 2008 financial crisis.”

Whether oil and natural gas production increases reduce oil imports or allow gas exports “doesn’t matter much to world balances,” said the Citigroup analysts. “Either way, North America is becoming the new Middle East.

“The only thing that can stop this is politics — environmentalists getting the upper hand over supply in the U.S., for instance; or First Nations impeding pipeline expansion in Canada; or Mexican production continuing to trip over the Mexican Constitution, impeding foreign investment or technology transfers — in North America itself.”

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