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U.S. boom in oil production spells peril for Canadian crude

The United States is now staring at an energy future awash with its own crude, with far-reaching consequences for Canada’s oil sands, the U.S. economy and global geopolitics.

Kate Kunz

A torrent of oil pumped from new wells across the U.S. is setting in motion a decade of dramatic change that promises to wean the country off OPEC, and threatens the growth of energy imports from Canada.

The U.S. is now staring at an energy future awash with its own crude, with far-reaching consequences for Canada's oil sands, the U.S. economy and global geopolitics. This massive shift has been sparked by changing political sentiment and technological advances that have allowed crude to be tapped in new places – from North Dakota to Oklahoma, Colorado, Michigan, and even Florida.

The United States, according to new data released Monday by Bentek, a U.S. energy analysis firm, will see its oil production rise nearly five million barrels a day, or 74 per cent, in the next decade.

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In that time, reliance on countries outside Canada will largely disappear. The U.S. today imports 45 per cent of its petroleum, half from OPEC countries. But by 2022, Bentek projects, only a million barrels per day will be delivered to U.S. shores by tanker – down from 6.7 million in 2011 and just 5 per cent of total demand – and at least some of those won't come from OPEC, but from countries like Mexico and Brazil.

The coming change, according to Bentek, is startling: By 2016, the U.S. will surpass its 1970 oil production peak of 9.6 million barrels a day; by 2022, it will have leapt to 11.6 million barrels a day.

For Canada, the news is both good and grim: Canadian crude, flowing by pipeline, will continue to be a substantial source of U.S. energy. But growth in Canadian exports south of the border could face a wall in 2018, when the combination of U.S. oil output and pipeline constraints raise the possibility for new "Canadian production to get pushed out," said Jodi Quinnell, one of the Bentek report authors. "What comes in to the U.S. will slow and basically remain flat from 2018 to 2025."

That projection suggests the coming half-decade will see Canada, and its fast-growing oil sands, struggle against the tide of U.S. oil. It also substantially raises the stakes for a country in the midst of two contentious applications to carry Canadian crude to the British Columbia coast for export to Pacific markets. It should "cause us to, even more than we are today, realize the importance of creating additional channels to the world," said Wayne Chodzicki, the Calgary-based global head of oil and gas for consulting firm KPMG.

The Bentek projection is, however, an ambitious one, surpassing the 2022 expectations of the federal U.S. Energy Information Administration by a full five million barrels per day, although the EIA forecast is in the midst of an upward revision. And the Canadian oilpatch expects U.S. growth to be substantially slower than Bentek suggests, in part because of the difficulty in building the new pipelines and rail cars to move that much new oil. Plus, U.S. companies are in the midst of a boom, and may need to take a break.

"I think there will be a pause or at least a partial slowdown over the next two or three years to drive costs down. So the growth profile won't be as strong," said Scott Saxberg, the chief executive of Crescent Point Energy, a Calgary company with wells in North Dakota that provides it a window on U.S. activity.

As a result, Mr. Saxberg and the Canadian Association of Petroleum Producers believe Canada will have little trouble sending oil to the U.S. in coming years.

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No one, however, questions the U.S. oil boom, which has come amid a drilling frenzy. Three years ago, 288 U.S. rigs were drilling for oil. Last week, according to data tracked by energy services firm Baker Hughes, 1,409 rigs were chasing oil, a nearly fivefold increase.

The eruption of local oil is a tremendous boon. Producing an additional 5 million barrels a day will require an investment, conservatively, of at least $125-billion, based on current costs. And it portends substantial change in a global military-strategic arena that has long been driven by the need to move oil to the thirsty U.S. At least one, and often two, U.S. naval carrier battle groups still prowl the Persian Gulf. Keeping open the Iran-threatened Straits of Hormuz – through which a stream of tankers move a staggering 17 million barrels daily, or one-third of all seaborne oil – remains a vital American military role.

Ending all, or nearly all, U.S. imports from the volatile Middle East might fundamentally change the geo-political view from the Oval Office, although broader threats to global economic disruption would remain.

The U.S. boom also comes against a political backdrop that has for decades held domestic energy production as a holy grail. This year's presidential campaign has been little different.

"We're not going to have to buy oil from the Middle East, Venezuela, or any other place we don't want to," vowed Mitt Romney, the Republican challenger for the White House who claims he can deliver American energy independence by 2020.

At the same time, President Barack Obama has sought to take credit for the current boom.

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"Oil production is up. Natural gas is up," the President has said. "In the last year alone, we cut oil imports by one million barrels a day, …. today the United States of America is less dependent on foreign oil than at any time in the last two decades," he added, without mentioning that a grim and lingering economic downturn coupled with the boom in natural gas fracking are mainly responsible for oil import reductions.

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About the Authors
Asia Bureau Chief

Nathan VanderKlippe is the Asia correspondent for The Globe and Mail. He was previously a print and television correspondent in Western Canada based in Calgary, Vancouver and Yellowknife, where he covered the energy industry, aboriginal issues and Canada’s north.He is the recipient of a National Magazine Award and a Best in Business award from the Society of American Business Editors and Writers. More

International Affairs and Security Correspondent

Paul More

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