Here's a photo of me walking the Windsor castle grounds with Russian Ambassador Alexander Yakovenko, and the ever-present Russian security force following closely behind.
One of the ongoing themes during our trip—besides the ominous black car—was the assumption that North America, in general (even including Mexico, in one version), and specifically the U.S., is approaching energy self-sufficiency.
Not tomorrow or next year, this widespread opinion runs, but within the next 10 to 15 years.
According to this line of thinking, imports would be left meeting about 30% of a declining crude oil demand in the American market. And that import flow would be provided by Canada.
U.S. oil production is rising quickly, more than offsetting the prognostications of an accelerating decline in extraction levels. But it is where this volume is coming from that provides the key to where things are heading in the future.
Unconventional sources.
The U.S. is the most developed oil region in the world, at least when it comes to traditional sources of crude. These are the free-standing fields from which oil is extracted by vertical drilling and artificial lifting.
The use of the electric submersible pump, rod lifting apparatus, and the ever-present "walking beam" are staples of well production. Until last year, approximately 60% or more of total production in the American market came from so-called "stripper" wells—an older well that is close to the end of its economically useful life—each providing less than 10 barrels of oil a day.
High water cut, low pressure, and reservoir problems all contributed to the widespread conclusion that U.S. production would continue to decline, while imported crude would consistently meet a greater percentage of domestic demand.
Then something happened.
Development of unconventional oil accelerated.
Shale oil, tight oil, heavy oil, bitumen and oil sands became the wave on both sides of the Canadian-U.S. border. Production began increasing, and the prospects of fundamentally revising the sourcing balance emerged right along with it.
Last year marks the first rise in American domestic oil production in almost a decade.
This year is likely to result in the highest overall production figures since the mid 1990s.
This entire largess results from unconventional drilling.
Shale Provides a Production Boost, but Quality Is a Concern
The Bakken, Williston and Three Forks basins in North Dakota and Montana were the first to receive attention. Then followed discoveries in very deep oil/gas formations in places like the Eagle Ford in southern Texas and the Utica in eastern Ohio.
The huge volumes of shale oil in the Rocky Mountain region and oil sands in northern California have been known for some time. In both cases, environmental concerns have limited production, although shale oil extractions have been on the rise in several states.
See, the potential for self-sufficiency is not without problems.
First up, continued development of shale and tight oil requires considerable horizontal drilling, fracking and significant environmental impact.
This reintroduces concerns over water quality, land usage, adverse social and infrastructure pressures, as well as a continuing challenge to the industry on what goes into these fracking fluids.
Then, there is the problem of upgrading the heavy oil realized to synthetic crude (syncrude) and providing for sufficient pipeline and refurbished refinery installations to process it.
Another consideration is the energy balance.
Unconventional natural gas (shale and tight gas, coal bed methane) is likely to meet our needs for the next century. But they carry the same problems associated with unconventional oil, in addition to a depressed market price from the excess already produced.
Solar, wind, geothermal, biofuels and even renewed interest in nuclear have considerably enlarged the conversation and the apparent options.
However, until we figure out how to offset our dependence on oil products for transport purposes, crude will continue to be central.
And you know what that means.
Self-Sufficiency Will Be Expensive
Rebalancing the energy mix will be expensive, even if we have a range of reliable alternative sources. Unless there are continuing government subsidies, solar and wind will continue to cost more to produce and transmit.
But even on the oil side, providing for American requirements through domestic or Canadian production will not result in savings.
In fact, the cost to the end user will increase.
It will be more expensive to extract and process the new crude. And transporting Canadian heavy oil all the way to the Gulf will result in the gasoline and diesel processed from it costing more, too.
The latest figures suggest a $0.04 rise per gallon; however, with the return of U.S. demand, that estimate is almost certain to increase.
Self-sufficiency, therefore, may be the mantra from a national security standpoint. . .
But it will not relieve the pressure on pricing.
American consumers may end up being less concerned about higher Brent oil prices in London (since there would be less reliance on non-North American imports). But other cost pressures resulting from the rise in domestic usage will replace that concern.
Even self-sufficiency, it seems, has a rising price tag.
Sincerely, Kent
Kent Moors, Money Morning
