While the tanker market has been bracing itself for the possible closure of the Strait of Hormuz and an ensuing loss of 12 million barrels/day (13%) of world oil production, during the first half of 2012, a change of a much more subtle nature is already impacting tanker shipping. Oil production in the US, the world’s largest importer of crude oil, is on the rise for the first time since the 1970s. By Mike Corkhill.
US imports of crude and petroleum products, at 8.9 million barrels/day (b/d), are now 2.34 million b/d lower than the level of five years ago and at their lowest since 1998. US oil imports now represent less than 50% of the country’s consumption of 19 million b/d.
The decline in US oil imports has been made possible by energy conservation measures and an increase in domestic oil production of 0.6 million b/d over the past five years. The country’s oil output had been falling steadily for almost four decades but the recent exploitation of shale oil deposits has turned the tables. Taking into account increased US exports of refined petroleum products, the country has managed to achieve a net reduction of 1 million b/d in oil imports over the period.
The US gain in crude oil output since 2006 has been the world’s largest amongst the world’s oil producers and progress to date is recognised to be just the beginning as a wide array of new shale oil and oil sands reserves are set to be developed.
The US has enjoyed even greater success in developing its shale gas resources in recent years, to the extent that US natural gas prices have tumbled by over 80% compared to 2008 and are now approaching historic lows. As a result drillers now stand to reap greater rewards in the oil sector where sky-high global oil prices still pertain in the US. Optimism over greater volumes of US oil production is rising in tandem with the attention the drilling community is now devoting to oil shale plays.
Other drivers for greater levels of exploitation of unconventional domestic US oil resources are geopolitics, economics and environmental concerns. Of the US oil imports of 8.9 million b/d, 4.2 million b/d is sourced from Organisation of the Petroleum Exporting Countries (OPEC) fields. The US authorities would like to continue to reduce this dependency.
Despite the decreasing import volumes, the rise in oil prices in recent years means that overseas oil purchases have helped to push up the US foreign trade deficit to almost unsustainable levels. In 2008, when crude prices peaked at USD 145 per barrel, oil imports were responsible for a record high 45% of the US foreign trade deficit. More recently, although prices have eased somewhat, oil purchases are still costing the country some USD 400 billion per annum and continue to have a debilitating effect on the US economy.
In 2011, even allowing for the revenues generated by rising refined product exports, oil imports accounted for a substantial part of the country’s USD 500 billion foreign trade deficit. The indirect costs of maintaining stable deliveries of foreign oil are also considerable, not least due to the need for an overseas military presence to protect oil supply lines.
Approximately three-quarters of US oil imports are consumed by the transportation sector. The US Government is looking to further reductions in the use of oil products by vehicles in the years ahead as one way of achieving additional cuts in oil imports. This will be accomplished through the use of electric hybrid and enhanced performance engines and natural gas to power heavy goods and municipal vehicles.
Amongst the environmental drivers for change is a requirement for US automakers to achieve a doubling of the federal corporate-average fuel economy standard, to up to 54.5 miles per gallon, by 2025. Also, a 2007 law requires oil companies to quadruple production of renewable auto fuels by 2022.
Notwithstanding the contribution made by mandated environmental and conservation measures, increased exploitation of the country’s unconventional oil reserves will yield the greatest reductions in future US oil imports. Drilling companies are now adapting the same horizontal drilling and “fracking” technologies used to develop shale gas reserves to extract “tight oil” from at least half a dozen major shale and tar sands deposits across the country. Refinements to this technology have succeeded in bringing down the cost of extracting a barrel of US unconventional oil to about USD 70, well below the current USD 92 per barrel for Brent crude in the international marketplace.
The US Government predicts that domestic hydrocarbon liquids production will rise 22% by 2020, to 9.2 million b/d, while the country’s overall oil consumption will fall by 2 million b/d by that date as a result of fuel-switching and conservation measures.
Reliance on tanker shipments from overseas suppliers, particularly the OPEC producers, will be further eased by increasing pipeline deliveries from neighbouring Canada, a country also currently stepping up production of its own unconventional oil reserves. Another activity with positive potential in the years ahead is the development of deepwater oil fields in the Gulf of Mexico.
Talk amongst industry watchers now is focusing on how soon the US can achieve energy independence. Oil and gas major BP predicts that the US will be 94% self-sufficient in energy by 2030, up from 77% now, as oil imports fall by half. Analysts at Citigroup state that the US, with the help of Canadian supplies and in combination with conservation measures, can achieve energy independence by 2020.
American motorists were spending USD 4 per gallon to fill up their tanks earlier this year. The thinking is that, even with crude oil priced at USD 70 per barrel, it will not be possible to lower the price of gasoline to much below USD 3 per gallon. At that level oil refiners will be in a position to not only meet the needs of the domestic market but also increase volumes of profitable refined product exports.
Few energy developments these days come without challenges and the exploitation of US shale oil resources is no exception. The two principal challenges in this instance are logistics – getting the new oil from remote production locations to the main refining centres – and the light, sweet characteristics of the US shale crudes.
Logistics-wise, steps are being taken to enhance pipeline and rail connections linking the US interior with the Gulf coast refineries. In this respect the hub role of the Cushing, Oklahoma oil distribution centre will be considerably enhanced.
The entry of growing volumes of light shale oil into the market in the years ahead will act to reduce the premium enjoyed by lighter over heavier oil grades and jeopardise past investments made by US refiners in coking facilities to enable the processing of heavy, sour overseas crudes.
Irrespective of how refiners cope, rising shale oil output will also bring greater volumes of natural gas liquids (NGLs) onto the market. Elements of this product stream will be utilised both as feedstock by US Gulf petrochemical complexes, thereby enhancing the competitiveness of US chemicals in the global marketplace, and to support growing US LPG exports.
US tanker traffic over the coming decade will be characterised by a reduced number of laden crude oil carrier arrivals and increasing volumes of product, LPG and chemical tanker exports.
LNG export cargoes, from currently idling US import terminals provided with new liquefaction plants to process local shale gas reserves, will also figure for the first time, beginning in 2015, but that is another story.
Editor’s Note: Mike Corkhill is a technical journalist and consultant specialising in oil, gas and chemical transport, including tanker shipping and chemical logistics. A qualified Naval Architect, he has written books on LNG, LPG, chemical and product tankers and is currently the Editor of LNG World Shipping.
Feature articles written by outside contributors do not necessarily reflect the views or policy of BIMCO.