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Continental contrasts

Oil and gas production in North America is continuing its rising trend. Mexico's prospects are looking up, while Venezuela's hydrocarbon sector is collapsing

North American liquid hydrocarbons output hit 20.1m barrels a day in 2017, as production from the US and Canada offset a decline in Mexico, according to the latest BP Statistical Review of World Energy. US oil output is expected to continue to rise. The US Energy Information Administration expects oil production to grow by 1.4m b/d this year, and another 1m b/d in 2019. It also suggests natural gas output will increase by 10%, to 81.2bn cubic feet a day. As such, the US looks set to remain the world's largest oil and gas producer in 2018.

Such production growth is presenting challenges to the US and its neighbours in the Americas. On the domestic front, new infrastructure is urgently needed to transport rising hydrocarbons production to consumption and export points, and to import heavy Canadian crudes for the US refining system to balance its feedstock needs. That refining system is evolving to enable it to process significantly increased volumes of light tight oil (LTO), which many analysts believe has limited export appeal. Meanwhile, domestic gas prices remain under pressure as the market waits for export outlets and new chemical projects to provide additional demand.

This 'shale evolution' in oil and gas is taking place amid contradictory and often incoherent signals from Washington, as the Trump administration's loudly trumpeted goal of "energy dominance" clashes with policies that hinder hydrocarbons development. "One thing that's constant is 'Let's undo what Obama did'", says a Washington-based analyst, who argues that the current US administration lacks a long-term view of how to address challenges arising from the shale evolution.

The industry "isn't yet a mature resource" this analyst contends, adding that he doesn't expect any long-term energy policy framework to emerge from the current administration. "Trump is not worried about his legacy. He's worried about the news cycle that day," he says.

Rising capacity

The administration's inattentiveness to hydrocarbons policy hasn't kept the oil and gas industry from pushing development on all fronts. International majors ExxonMobil and Chevron have now made their acreage in the Lower 48 states central to their growth. Chevron has announced a 70% increase in development spending in the Permian Basin in Texas and New Mexico for 2018, while Exxon plans to increase its output in the basin five fold to around 500,000 b/d by 2025. In the midstream sector, Exxon is reportedly close to deciding on a significant increase in capacity at its Beaumont, Texas refinery to improve its ability to process LTO. Meanwhile, Marathon Petroleum in April agreed to acquire refiner Andeavor and is restructuring its system to improve processing of both US LTO and heavy Canadian crudes. The latter's constrained logistics have led to widened price differentials and improved economics for inland US refiners.

Washington's focus seems to be on electricity, where Perry continues to push coal-fired and nuclear generation

Export logistics developments are expected to be key to continued expansion of US Lower-48 hydrocarbons production, particularly as not all new US oil output will find a home in the continental US. A number of midstream companies, including Enterprise Products Partners, Buckeye Partners, and Epic are developing new pipeline capacity to transport oil from the Permian and Eagle Ford shale basins to US Gulf Coast ports. The expectation is that US LTO will find dependable export homes. "Everything's about exports," says one oil analyst.

Oil refiners note, however, that LTOs may have a harder-than-expected time integrating into world oil markets because of competition from other light sweet crude producers and other countries' downstream product slates. These favour crudes with higher middle-distillate yields than most US LTOs produce. US tariffs on Chinese goods may also be met with limitations on exports to that market.

Nafta uncertainty

Given the return of the US to world oil export markets, integration of the continental US market with Canada and Mexico, whose largely heavier crude oils and logistics complement the US markets, is essential to processing and absorbing increasing US crude production, and US oil product exports. A Washington, DC-based analyst points out that despite the Trump administration's often-contradictory rhetoric on trade, it continues to view the North American market, including Canada and Mexico, as a single energy entity. The EIA reports that in 2017, Canada and Mexico together accounted for 83% of total US gas exports, including liquefied natural gas. The two countries also took 30% of total crude oil and petroleum product exports.

Whether the US will be able to maintain this export pace with its two closest neighbours is uncertain. The Trump administration is scheduled to begin a formal renegotiation of the terms of the North American Free Trade Agreement (Nafta) this August, and the outcome is unsure. Also, the US oil industry is lobbying for exemptions to steel import tariffs imposed by the administration this spring to safeguard supply of steel grades necessary for pipeline construction. Increased steel prices challenge the oil and gas industry's need to control costs in an uncertain oil price environment.

In the medium term, the US oil patch may face other challenges. US oil products exports have boomed since 2010, averaging 5.2m b/d in 2017, according to the EIA. But this boom has partly resulted from a 1m-bd drop in refinery runs in Latin America, mostly in Brazil, Mexico, and Venezuela. In 2017, Latin American refineries, including a Mexican plant, ran at a mere 60% of capacity, down from 80% in 2012. Oil industry officials question whether the market will as easily accept US refined products exports when these refineries return to the market.

Mexico discoveries

Increased production, over the medium term, from Mexico following its successful reserves bidding rounds is likely. Premier Oil of the UK and Eni of Italy have announced billion-barrel discoveries. Eni plans for first oil from its fields in 2019, as it deploys the fast-track project management that brought its Egyptian Zohr gas discovery offshore on stream in less than two-and-half years. Across the Gulf of Mexico and Caribbean, Exxon also expects to bring its giant discovery offshore Guyana on stream in 2020.

Elsewhere in South America, Brazil's recent licensing round sparked intense interest and expectations that its production will soon begin to rise well above its current 2.7m b/d, while gas production from Argentina's Vaca Muerta shale prospects are also likely to increase as experience and the scale of investment have reportedly halved well costs to around $8m. Guaranteed gas prices set by the Argentine government are helping to encourage Vaca Muerta development.

The Americas laggard is Venezuela. Production is falling as the Nicolás Maduro dictatorship continues catastrophically to mismanage the oil industry and the economy at large. Oil analysts believe that despite aggressive rhetoric the US government hopes the Maduro government collapses under its own contradictions. It would prefer to formally impose full sanctions on the country's oil industry. Analysts say Venezuelan oil output, which BP estimates has fallen by 1m b/d in the past decade, may rebound more quickly than many expect if given the opportunity.

LNG boom

Much-touted US LNG exports have increased dramatically since the first cargo loaded at Cheniere Energy's Sabine Pass liquefaction plant in February 2016. In March, Dominion Resources' Cove Point plant began exports, and a number of other liquefaction trains are expected to begin exports through 2020. Since 2016, South Korea and China have been the second- and third-largest markets for US LNG, taking a combined 32% of total LNG exports.

US LNG has benefitted from Canada's lengthy and cumbersome permitting procedures, which have delayed construction of proposed liquefaction plants in British Columbia. But industry officials believe this logjam may be broken soon, as Shell's 23m-tonnes-a-year Canada LNG project looks set to reach its final investment decision later this year. Malaysia's Petronas has taken a 25% equity stake in the project, and a consortium of Fluor of the US and Japan's JCG has been nominated as engineering, procurement and construction contractor. Industry officials expect Canadian liquefaction plants to compete with US LNG for Asia-Pacific markets.

With the number of new upstream and midstream projects growing in the Americas, US oil and gas policy seems to be "let the market sort it out", according to one analyst. Industry officials say the combination of additional export infrastructure from prolific US onshore plays; increased hydrocarbon production throughout the Americas; and the increasing role of LNG in the global energy mix will take some time to settle into a new paradigm.

Gas up, coal down

Washington's principle focus seems to be on the electricity sector, where energy secretary Rick Perry continues to push support for coal-fired and nuclear generation in a market flush with low-cost gas. Gas now fuels 32% of US power generation, while coal fuels 30%, and the EIA expects gas's share of the energy market to grow while coal continues to decline, absent any formal policy change from Washington.

Some analysts believe the administration may succeed in limiting coal and nuclear plant retirement by arguing that particular facilities are necessary to support the system in the event of a cyberattack. But this would be an unusual justification. Most concern about possible cyberattacks on power systems has tended to focus on transmission and distribution systems.

The power industry has so far largely rejected Perry's argument that coal and nuclear plants benefit the system by having fuel stored "on-site", but industry officials and analysts don't exclude that the US may institute a dirigiste system to keep some coal plant on the system. On 1 June, Donald Trump directed Perry to find a means of keeping coal plant operating. Research firm Bloomberg New Energy Finance estimates that this year will see as much as 15 gigawatts of coal plant capacity closing, close to 2015 peak closure levels.

While the electricity generation debate continues, oil companies operating in the US are divided as to whether to continue to push for further deregulation of the energy sector, or to maintain their operational policies. These take into account climate-sensitive policies announced by the Obama administration. One analyst believes smaller upstream companies favour deregulation, while larger firms—which keep a close eye on shareholders and the possibility of a new administration after 2020—favour stability. Their attitude is "we don't care what the regulations are, so long as they're stable", he says.

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