The Changing North American Oil Picture: Special Focus on Refining, Infrastructure, and Policy Issues
July 11, 2013
The success and speed of the development of U.S. shale gas and tight oil resources has already had a dramatic impact on both the domestic and global energy pictures. The shale gas boom has created jobs, triggered economic development, attracted substantial new investment in and to the United States, improved the environment by displacing coal in power generation, spawned a technologic resurgence in oil and gas, and is projected to transform the country from a net importer of natural gas to a net exporter by the end of the decade. The surging production has also brought about rapid change in production technologies and protocols and increased scrutiny and attention to the environmental issues surrounding such large-scale development, especially in the areas of improved well integrity, management and choice of frack fluids and chemicals, water management (usage, treatment/recycling, and disposal of waste water), fugitive emissions, and seismicity concerns.
Similarly, the expanding opportunities in tight oil and similar onshore plays, coupled with increased production from Canada’s oil sands and conventional offshore tracts has altered the landscape with respect to U.S. and North American oil and liquids trajectories. From a purely volumetric standpoint, the surge in American liquids output has dramatically increased U.S. production (highest level in decades), while substantially reducing reliance on imported oil and (when coupled with declining petroleum demand here) increasing exports of refined petroleum products. The tight oil revolution shares many of the economic benefits attributed to the shale gas surge. It also carries many of the same concerns and raises similar and some additional policy issues that will need to be addressed.
And while much attention has deservedly been focused on the dramatic changes in upstream activity, our ability and success in being able to utilize these resources optimally will increasingly depend on the pace and configuration of infrastructure needed to deliver these raw materials in usable form to consumers. For gas, this requires the timely development of pipelines, storage facilities, and end-use infrastructure; for liquids it involves everything from tankage and separation facilities in the field to economic and environmentally safe means to transport (rail, barge, tanker, truck, pipe, etc.), blend, refine, and ultimately deliver these end products to users/consumers. The recent derailment in Lac-Megantic, Quebec, has brought the rail issue to a heightened level of attention.
For refiners, the production increases are more than just about volumes. Crude quality and other characteristics (e.g., total acids, salt, chlorides, other impurities, and consistency of the blend quality, etc.) become increasingly important as is the match with current (or planned) equipment, optimal product slates, prices of both the raw materials and finished products, and regulatory costs and policies. As U.S. petroleum demand has declined, surges in domestic output, especially from the light grade oils found in the Bakken, Eagle Ford, and Niobrara have led to a dramatic decline in correspondingly light oil imports, especially from Angola, Nigeria, and Algeria. Further increases in heavier Canadian oil sands and U.S. basins will challenge domestic refiners to creatively blend crudes and reconfigure operations (add cokers, hydrocrackers, etc.) to be able to take advantage of this surge while being able to consistently produce an economically attractive product slate. But these investments will take time. And in the interim—think over the next decade(s), not months—transport and upgrade/maintenance bottlenecks will come and go, and refinery utilization rates and product output and prices will vary, especially regionally.
At some point, in the not too distant future, export policy with respect to crude oil will need to be revisited as will the permitting of large infrastructure projects; the size, composition, and logistics associated with the strategic petroleum reserve; the utility of the current restrictions on Jones Act vessels to transport U.S. oil between domestic ports; and nearer-term regulatory issues surrounding renewable fuel standards and the “blend” wall, the treatment of renewable identification numbers (RINS), and the definition of condensates (for export purposes) just to name a few. Addressing these issues prudently and pragmatically with an eye on both the present and the future will require policies and incentives that are at once responsible, flexible and adaptive (recognizing the evolving changes in technology, regulation, knowledge, operational practices, and market conditions), and collaborative among government regulators, industry partners, and impacted stakeholders.
The ability to prudently access America’s vast unconventional resources carries great opportunity but also significant challenge. These are but the early days in the transition, and a great deal of change is yet to occur. Though the commercial and strategic outcomes are difficult to predict, the shift is already underway and the time ripe for a reevaluation of policy.
Over the past three years, the CSIS Energy & National Security Program has devoted considerable time to public education and examination of the issues surrounding this resource development. In the coming months, we will continue to examine the infrastructure needs, policy issues, and geopolitical implications of this energy revolution. To examine CSIS programs and projects devoted to these issues, please visit our website at csis.org.
Frank Verrastro is senior vice president and holds the James R. Schlesinger Chair for Energy & Geopolitics at the Center for Strategic and International Studies (CSIS) in Washington, D.C. David Pumphrey is a senior fellow and codirector of the CSIS Energy & National Security Program.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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