“When the crude oil export ban was lifted in January 2016, many broadly viewed it as good for the industry and free trade but were not quite sure about its impact. In 2017, we saw U.S. exports of crude, as well as liquefied natural gas (LNG), and refined products continue to rise…
“This rise aligns nicely with the new administration’s motto of ‘energy domination’ for the United States. Although still a net importer of crude, our growing place as an energy exporter and low-cost supplier could fundamentally change our position in the global energy landscape. Furthermore, it could change our views on geopolitics and national security.” John England, vice chair, U.S. Energy & Resources Leader, Deloitte, LLP published in 2018 Outlook on Oil and Gas, My Take, (January 2018).
Will America’s newfound energy strength lead the country along the path to energy isolationism or will it evolve into the energy supplier-of-choice in a global, free trade market? The first test is the NAFTA (North American Free Trade Agreement) negotiations. The second is if OPEC runs out of cards and it can become a leader in tight oil production, while the third is determined by the rise of U.S. shale gas being shipped abroad as LNG (liquefied natural gas) and extra barrels of propane being produced from the shales. All three would signal the ascent of the U.S. as a market leader and price setter.
Energy & NAFTA
Canadians, meanwhile, are not sure what to make of their American neighbours’ new swagger. In December 2017, Canada’s chief NAFTA negotiator Steve Verheul stated the government wants to ‘modernize’ the energy chapter.
David MacNaughton, Canada’s ambassador to the United States, said in early February he believes that NAFTA negotiators can reach an agreement-in-principle by the end of March. This upbeat assessment comes in the face of the continuing threat from American President Donald Trump to blow up the deal, which hangs heavily over the final eight weeks in the current negotiating schedule.
NAFTA, which came into force on January 1, 1994, includes an energy proportionality provision. The Financial Post explains, “[Article 605] means Canada and the U.S. cannot reduce access to each other’s oil, natural gas, coal, electricity, or refined petroleum products without an equivalent reduction in domestic access to the same product. So, if Canada wanted to cut oil exports to the U.S. by 20 per cent it would have to cut domestic supplies by 20 per cent as well, except in specific circumstances such as the need to protect national security.”
The anti-free traders, like the Council of Canadians, believe that Prime Minister Justin Trudeau’s push to renegotiate NAFTA’s energy chapter will have fateful consequences to the global climate crisis.
Maude Barlowe, the Council’s chief opponent of NAFTA says, “The Council of Canadians vigorously opposes NAFTA and its predecessor, the Canada-U.S. Free Trade Agreement, when they were being negotiated, and we have monitored these agreements and their fallout closely since. Our opinion of NAFTA has not changed,” she adds. “Quite the opposite. We want to protect Canadian water, jobs, the environment, and democracy.
“Progressive voices in Canada that have been highly critical of NAFTA as a tool for corporate interests find ourselves somewhat caught,” Barlowe assets. “Labour, environmental, indigenous, and social justice groups obviously do not side with the ‘Make America Great Again’ nationalism of the Trump administration,” she states, “At the same time, we are deeply critical of the pro-free trade policies of the Trudeau government and are highly doubtful that it is going to achieve any meaningful results from the renegotiation process unless NAFTA is profoundly changed.” The Council opposes the energy proportionality provision in NAFTA, says that trade disciplines (like the investor-state dispute settlement provision) should not be allowed to impede climate action, and asserts the need for a 100 per cent clean energy economy by 2050.
The pro-group, including 36 Republican Senators, support ‘modernizing’ the agreement “because it would serve to expand energy exports to maximize domestic energy production” and, along with other measures (including President Trump’s corporate tax cuts), “fuel historic growth.”
The Canadian Press reports, “Former Prime Minister Brian Mulroney offered a spirited defense of NAFTA in Washington in late January [to the US Senate committee on foreign relations]. Mulroney was warmly greeted by most US senators on the committee, who were largely united in their belief that while NAFTA needs to be modernized, the deal itself had been a boon to their country and North America.”
Mulroney added, “NAFTA did not happen by accident. In large measure it was the result of the leadership and vision of three great American presidents: Ronald Reagan, George Herbert Walker Bush, and Bill Clinton.”
The Mexican government also wants to be brought into the energy chapter having implemented an ‘energy reform’ law that seeks to attract billions in foreign capital to increase oil production to as much as four million barrels per day by 2025. Deloitte’s England agrees. “Mexico shows promise as a market for U.S. natural gas and refined products, but perhaps only if we are able to maintain a stable trading relationship. The outcome of this negotiation,” he adds, “may be indicative of our future path.”
Trade experts both in the United States and Mexico have said that increasing energy trade and investments through NAFTA would help reduce the $64 billion (U.S.) trade deficit with Mexico that irritates Trump, partly through increased U.S. gas and oilfield equipment sales to Mexico.
Canada is supportive of this, says our chief negotiator Verheul, “We’re also looking at bringing Mexico into the energy chapter because they were not part of it in the original NAFTA when it was negotiated.” Of course, the Council of Canadians believes that entrenching Mexico’s neo-liberal oil and gas laws in NAFTA would only worsen the climate crisis.
Furthermore, Bloomberg has reported, “Industry officials from all three countries are eyeing the deal as a way to seek more regulatory certainty and the harmonization of industry standards. Canada, for example, may use the negotiations to push for more predictability surrounding the approval of pipelines and power lines crossing into the U.S., following years of squabbling over TransCanada Corp’s proposed Keystone XL project.”
The Trudeau government’s support for all this is not surprising given Environment Minister Catherine McKenna’s advisory council on NAFTA includes a former president of Shell Canada who publicly supported the now defunct 1.1 million bbls/day Energy East Pipeline, while Foreign Affairs Minister Chrystia Freeland named the president of Gaz Métro to her NAFTA advisory council.
“One Canadian official,” speaking on condition of anonymity to the Globe and Mail, said bringing Mexican oil and gas under NAFTA would be an attractive prospect in trade talks.”
The seventh round of NAFTA talks is now scheduled to be held in Mexico City from February 26 to March 6, 2018.
OPEC’s Potential House of Cards
The rise of American tight oil is challenging OPEC’s global domination of the crude oil market. Deloitte’s England believes that OPEC is still playing with the same hand. “The production cuts announced last year, in coordination with Russia, which were then extended six additional months and later prolonged until the end of 2018, seem to have helped start a rebalancing of the market. At that time, Libya and Nigeria agreed to not raise their production.”
At some point, the global oil market needs a real demand boost to get prices going upward in a meaningful way, England adds.
According to the U.S. Energy Information Administration (EIA), an estimated 4.25 million bbl/d of crude oil was produced directly from tight oil resources in the U.S. in 2016 (its latest figures). “This was equal to about 48 per cent of total American crude oil production that year,” the Administration reported. Since 2010, the Permian Basin in Texas has consistently delivered rapid growth in tight oil and has emerged as the pre-eminent tight oil play.
ExxonMobil announced recently it plans to triple its production of tight oil and chemical feedstocks in the Permian Basin to 600,000 boe/d (barrels-oil-equivalent) and expand its infrastructure to bring those products to market by 2025. The company has asset aside $50.0 billion (during the next five years) to make this happen.
The Rise of American Shale Gas
The real juggernaut propelling the U.S. forward is shale gas. It’s not just the cost reductions achieved by unconventional producers, with break-even costs across the major American plays consistently 30 to 50 per cent lower than the levels of 2015, but the sheer volumes of shale gas being produced. The Marcellus field, in northeastern U.S., averages 33 bcf/d (billion cubic feet/day), the Permian Basin in Texas is second at seven bcf/d, totalling almost 40 per cent of U.S. supply.
Propane production has increased rapidly in the United States in recent years as natural gas producers have tapped into more shale formations. It is a byproduct of shale natural gas production and domestic producers have been looking for new markets for it since Canadian propane has lost market share to growing U.S. supplies in key petrochemical markets. American producer are also looking at Mexico, South American and Asia to sell their propane to.
By 2020, some American analysts believe the U.S. will challenge and maybe displace today’s current LNG leaders – Qatar (104.4 bcf in 2016), Australia (56.8 bcf in 2016), and Malaysia (32.1 bcf in 2016) – and be ranked in the top three with exports projected range from 53.74 bcf to 57.13 bcf.
As President Trump continues his push to Make America Great Again (MAGA), it’s obvious the American energy industry continues to grow its enormous financial contribution to the national economy. Only time will tell if it’s able to displace Russia and OPEC in oil production and elbow aside Russia, Iran and Qatar to lead the global natural gas industry. But first, it needs to deal with the ‘modernization’ of its energy policy under NAFTA.
And finally, it’s important to remember a global healthy energy industry needs a healthy ecosystem of producers, service providers, and manufacturers. So far, it’s the American producers who are doing well, while many oilfield service companies continue to suffer, unless there’s a wave of mergers and acquisitions.
#U.S. #NAFTA #OPEC #Keystone #EIA #ExxonMobil #Crude Oil #TransCanada #Canada #USA #TheRoughneck #PropaneCanada
