Market News

 January 10, 2014
US oil gush redraws global map

 The US shale oil boom has put refineries in Europe out of business and undercut crude suppliers in west Africa. Now drillers in the US threaten to roil Asian markets and challenge producers in the Middle East and South America.

Fifteen European refineries have closed in the past five years, with a 16th due to shut this year, according to the International Energy Agency (IEA), as the US went from depending on fuel from Europe to being a major exporter to the region.

Nigeria, which used to send the equivalent of a dozen supertankers of crude a month to the US, now ships fewer than three, according to the US Energy Information Administration (EIA).

And cheap oil from the Rocky Mountains, where output has grown 31 percent since 2011, will soon allow West Coast companies to cut back on imports of pricier grades from Saudi Arabia and Venezuela that they process for customers in Asia.

"I don't really think anyone saw this coming," Facts Global Energy analyst Steve Sawyer said.

"The US shale boom happened much faster than people thought. We're in the middle of a new game."

Advances in extracting oil from shale rock have driven US output up by 39 percent since 2011, the biggest rise in history, according to the EIA.

While drilling in shale is costlier than other methods and poses environmental risks, the prospect of a growing supply is encouraging analysts to predict a more energy-independent nation.

With US exports of petrol and other refined products hitting a record last month and the country on pace to become the largest oil producer by 2015, five years faster than the IEA's earlier forecasts, industry advocates such as Alaskan Senator Lisa Murkowski are calling for an end to 39-year-old limits on US crude exports.

In a measure of just how quickly the oil market has changed, President Barack Obama unveiled in March 2011 a goal considered so outrageous that correspondent Christopher Mims wrote on the environmental news website Grist that it could be accomplished only by "an economic crash bigger than any ever seen in US history, or perhaps an alien race forcing all of us to take to our bicycles". Obama said that by 2025 the US would cut crude imports by a third. It didn't take 14 years, it took less than three.

The US is so flush with crude that imports are plunging and drillers are challenging export limits imposed after the 1973 Arab oil embargo.

Easing controls would have been unthinkable just three years ago, when uprisings in Arab countries such as Libya pushed crude prices over $100 a barrel, said Philip Verleger, a former director of the office of energy policy at the Treasury Department and the founder of consultancy PKVerleger.

The boom has been led by drilling in the Permian Basin in west Texas and the oil-rich Bakken shale, which stretches from North Dakota into Montana and Canada.

North Dakota and Texas have more than doubled crude output since Obama's 2011 speech, with Texas pumping more than Iran, according to the EIA and a Bloomberg survey of producers, oil firms and analysts.

Drilling is spreading in emerging oilfields in the Rocky Mountain area and spurring a revival of crude extraction around Wyoming's Teapot Dome formation, home of the first US reserves. Colorado's output jumped by 17 percent in the first 10 months of last year, according to the EIA.

A record amount of crude is already riding the rails to California's fuel makers, according to the California Energy Commission.

If the railway networks on the US West Coast are completed, the region's refiners will be able to use domestic crude supplies to boost exports to meet rising needs in Asia. China, already the largest importer, will be increasingly reliant on crude from the Middle East and refined fuels from the US as its rising middle class consumes more energy.

An increase in the number of US cargoes to Asia might force Saudi Arabia to cut its output to head off a worldwide glut, Verleger said.

The US gains have been made possible by innovations in horizontal drilling and hydraulic fracturing, or fracking, that have unlocked fuel trapped underground in rock.

The process comes with environmental risks.

A 2011 US government report found fracking chemicals in groundwater in Pavillion, Wyoming, and in June, 47 people died when an unmanned train carrying Bakken crude derailed and exploded in Lac Megantic, Quebec.

Crude from the Bakken might be more flammable and more dangerous to ship than other types of oil, the US Transportation Department said last week.

Fracking is also more expensive than traditional extraction.

Drilling a horizontal shale well in the Bakken can cost 10 to 20 times what a vertical well might cost, according to Drillinginfo.

Output from shale wells declines by 60 percent to 70 percent in the first year, while output from traditional wells falls by up to 55 percent in two years before flattening out, it says.

One reason the US still depends so much on imports is that growth in demand continues to outstrip supply.

New rail routes and pipelines are carrying increasing supplies of crude to refiners in New Jersey, Louisiana, Texas and Pennsylvania, which are sending cargoes of diesel to Europe.

US fuel exports to the Netherlands import hub reached a record in September last year, according to the EIA.

The US oil boom has hit Europe's refining industry particularly hard because refiners outside North America typically buy oil based on the price of Brent crude, a North Sea grade that last year cost on average almost $11 a barrel more than the US benchmark West Texas intermediate (WTI).

WTI futures on the New York Mercantile Exchange closed at $93.67 a barrel on Tuesday, a 13 percent discount to the Brent settlement of $107.35 on the ICE Futures Europe in London.