North American Oil and Gas Investing

The Shale Boom Hits a Roadblock

By Jon Carter
Thursday, October 24th, 2013

To date, Canada and the United States are the only two commercial producers of shale commodities in the world. This will change soon, as countries like China, Poland, and Argentina invest more in shale exploration. But the reason North America has been able to become pioneers of the industry is because of the perfect stew of open landscapes, lax fracking regulations, and innovative drilling technology.

pipelineLand rights have been a barrier, but more landowners are cashing out and getting rich from mineral rights. And there are new shale plays being discovered that will continue to propel the shale oil boom forward.

Two plays in the U.S. are mainly at the helm of the energy boom: the Bakken and the Eagle Ford.

The Eagle Ford of South Texas went from 352 bpd in 2008 to over 600,000 bpd in 2013.

Overall, U.S. oil production increased 14 percent in 2012 and will continue to increase as the years go by.

And thanks to production levels from the Bakken of North Dakota, the state is soon to reach one million bpd.

The Bakken and the Eagle Ford are the two spearheads of national production, but other shale areas like the Niobrara Shale and the Mancos Shale are rich areas that will provide a boost to production numbers.

In Canada, the Athabasca tar sands region and the Duvernay shale are leading areas being developed.

Canadian production is expected to double by 2030, rising from 3.2 million bpd to 6.7 million bpd, mostly coming from oil sands.

This is great news for both nations, but the problem going forward will be a lack of infrastructure.

Canada and the U.S. have suffered backlogs stemming from a lack of oil pipelines, which has forced sellers to offer discounts on the markets.

Pipeline Infrastructure

Transnational projects like Keystone XL will be beneficial to both nations.

But XL is nowhere closer to approval than it was a few years ago, and Obama may very well leave the decision to the next administration.

The primary purpose of XL will be to ship crude from western Canada to refineries in the U.S. Gulf Coast. But the pipeline will also provide relief to producers in the Bakken.

It is the exact kind of infrastructure that both nations need to relieve supply gluts and ensure smooth operations.

But TransCanada (NYSE: TRP), the operator of the potential XL pipeline, has other projects in the works in the form of the Energy East pipeline, which will form a gateway between Canadian production in the West and refineries in the East.

But like Enbridge’s (NYSE: EEP) Northern Gateway Pipeline, environmental and political issues are stalling the EE project. One issue that holds back Northern Gateway are indigenous land rights. But TransCanada is expected to file paperwork for Energy East next year to the Canadian National Energy Board.

Energy partnerships with Canada is one thing, but the U.S. needs to push for more large-scale, nation-based infrastructure projects like Energy East and Northern Gateway.

The U.S. is seeing more localized infrastructure, but we need more large-scale national pipelines that will further connect refining and producing regions within the country.

If Keystone XL and Energy East are approved, you’re going to see an increase in oil prices for producers, and production will increase as supply backups begin to ease. Since crude would be flowing smoothly, you’re going to see refineries in the U.S. and Canada decreasing the need for foreign imports as more domestic crude fulfills demand.

If they are not approved, you’re not only going to see the same problem of backlogs and price discounts on the market, but it could get worse as production rises in both nations.

But a lack of infrastructure will not stop production, since more companies are relying on railway transportation. The problem is that trains are slower and expensive, and there is a higher chance of accidents.

Russia could gain more influence in Asia, as the nation touts its ESPO Siberian crude as a competing benchmark against Brent and WTI. North America could offset ESPO – if there is the necessary infrastructure in place.

Companies like BP (NYSE: BP) and ConocoPhillips (NYSE: COP) are eying Alaska as a strategic point in competing with Russia for the Asian market.

Lacking infrastructure will not halt production, but it will continue to be a burden that will hold back North America’s progress on the world energy stage.

North America has had the success of supplanting Iran’s oil supply ever since sanctions have virtually crippled the Persian energy economy.

And countries like Venezuela, Mexico, Canada, and Chile are increasingly importing oil and gas commodities from North America, Forbes reports.

North America also has a real chance of breaking Russia’s monopoly hold on natural gas in Europe. And since natural gas prices are low, exporting shale gas as liquefied natural gas would provide competition against Russia and would do its part in raising natural gas prices to productive levels.

With all of these positive indicators, there should be a stronger mandate for pipelines as both countries gear up to become serious exporters of oil and gas on the world sphere.

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North American Investing

There are skeptics who believe the shale oil boom will become a bust. While nothing is guaranteed in the energy industry, Canada and the U.S. should at least try to push the brink of production to see where things go in the future. Saudi Arabia has already been forced to cut production levels in response to North American production. Canada has decreased the need for West African light crude – forcing the African sector of OPEC to look for other markets.

Investors like Warren Buffet have invested in regions like the Bakken, and GE (NYSE: GE) has seen the most growth from its oil and gas sector in its third quarter report.

Big Oil has been somewhat behind in attaining shale success, since companies like Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX) and Shell (NYSE: RDS-A) came late in the game, but local energy companies have had the most success in extracting shale oil.

Natural gas prices may be low, but they are inching back up, which is a good sign for larger oil companies traditionally known for gas development.

And when it comes to lower natural gas prices, there is a positive trade-off. Since gas prices are depressed, this has fueled higher demand from manufacturing companies that need gas to fuel factories and make products. This has played a role in boosting U.S. manufacturing, and it has spurred job growth in this sector, which is always a good thing in a county with a minimal manufacturing base.

But shale oil is the place to get the most out of your investment, and there are many other shale areas like the Cline Shale near the Permian Basin of West Texas and the Three Forks near the Bakken that have remained underexplored. These new territories will be a strong backbone in the U.S. energy economy going forward.

So don’t worry, investors; this is just the beginning of the boom.


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