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North American Oil Boom: Outlook and
Challenges
Bahattin Buyuksahin
International Economic Analysis
Disclaimer: The views expressed in this presentation represent the author’s
own and should not be attributed to the Bank of Canada or its Governing
Council.
Protected B
Global Oil Market
Regional Contributions to Oil Demand Growth
3
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
0
20
40
60
80
100
120
-3.00
-1.50
0.00
1.50
3.00
$US per barrel
China Non-OECD ex China OECD Total Brent (right axis)
Annual data
Last observation: 2014
Note: The 2014 data are projections. The 2014 Brent price is calcuated from average monthly futures prices.
Source: International Energy Agency
Barrels per day (million)
Growth in world oil demand by region 2012 – 2035 (New Policies Scenario)
Source: International Energy Agency World Energy Outlook (2013)
Global supply capacity has increased owing partly
to increases in North American production
5
2013 2014 2015 2016 2017 2018
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
mb/d
Non-OPEC Crude Global Biofuels OPEC NGL OPEC Crude
World oil supply capacity growth
Annual data
Last observation: 2018 Source: IEA
Shares of world oil production by type
Source: International Energy Agency World Energy Outlook (2013)
Liquid Fuel Consumption in 2020 (mb/d)
The U.S. Energy Information Administration aggregates Mexico and Chile into a single figure for the 2013 projection.
Source: U.S. Energy Information Administration Annual Energy Outlook 2007 and 2013 reports.
23.8 19.5
2007 Proj 2013 Proj
United States
15.6 13.8
2007 Proj 2013 Proj
Europe
32.7 33.6
2007 Proj 2013 Proj
Asia
4.3 3.6
2007 Proj 2013 Proj
Africa
8.4 8.4
2007 Proj 2013 Proj
Middle East
5.7 5.9
2007 Proj 2013 Proj
FSU
10.8 6.4
2007 Proj 2013 Proj
Latin America
103.7 96.4
2007 Proj 2013 Proj
World
2.6 2.7
2007 Proj 2013 Proj
Mexico*
2.4 2.2
2007 Proj 2013 Proj
Canada
Crude Oil Production in 2020 (mb/d)
The U.S. Energy Information Administration aggregates Mexico and Chile into a single figure for the 2013 projection.
Source: U.S. Energy Information Administration Annual Energy Outlook 2007 and 2013 reports.
North American Oil Production
US Oil Production
10
6000
8000
10000
12000
1984 1988 1992 1996 2000 2004 2008 2012
Barrels per day ('000)
Total oil production
Total US oil production
Annual data
Last observation: 2014
Note: Total oil production refers to crude oil, natural gas liquids, and unconventional oil production in the United States.
Source: International Energy Agency
Increased Unconventional Production Nonconventional Sources of Oil and Gas
Source: National Energy Board
Growth of oil sands is the main driver behind surge in production
Source: Canadian Association of Petroleum Producers Last observation: 2030
0
1
2
3
4
5
6
7
8
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029
mb/d
Eastern Canada Oil Sands Conventional Heavy Conventional Light Pentanes
Annual data
Actual Forecast
Canada Oil Sands
13
Growth in US and Canadian unconventional oil
production
14
2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
0
1
2
3
4
5
6
mb/d
Canadian oil sands (heavy) U.S light tight oil (LTO)
Growth in unconventional oil production
Annual data
Last observation: 2035 Source: Canadian Association of Petroleum Producers and EIA Annual Energy Outlook (2013)
North American production is expected to increase
further due to tight oil and oil sands
15
2012 2013 2014 2015 2016 2017 2018
0
2
4
6
8
10
12
14
16
18
mb/d
Canada US
US and Canada crude supply
Annual data
Last observation: 2018 Source: IEA
Energy Independence of North America
US dependence on foreign oil continues to decline.
17
2012 2013 2014 2015 2016 2017 2018
0
10
20
30
40
50
60
70
0
5
10
15
20
Share of domestic supply in consumption (%)
Supply (LHS) Demand (LHS) Supply/Demand (RHS)
US supply and demand for crude oil
Annual data
Last observation: 2018 Source: IEA and Bank of Canada calculations
mb/d
Imports of lighter and medium grades have been
on the decline
18
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
0
200
400
600
800
1000
1200
kb/d
Algeria Angola Nigeria
US light crude oil imports from Nigeria, Algeria and Angola
Annual data
Last observation: 2012 Source: EIA
Total imports of heavy crude have been relatively
stable
19
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
0
400
800
1200
1600
2000
kb/d
Iraq Saudi Arabia Venezuela Brazil Mexico
US heavy crude oil imports
Annual data
Last observation: 2012 Source: EIA
Canadian exports to the US have been increasing
steadily since the 1990s
20
1995 1997 1999 2001 2003 2005 2007 2009 2011
0
20
40
60
80
100
0
2000
4000
6000
8000
10000
12000
%
Canada Share (RHS) Non-OPEC (exc Canada) Share (RHS) OPEC Share (RHS)
Total Imports (LHS) Imports from OPEC (LHS) Imports from Non-OPEC (exc Canada) (LHS)
Imports from Canada (LHS)
US crude oil imports
Annual data
Last observation: 2012 Source: EIA
kb/d
Trade Direction
21
Source: IEA Medium-Term Market Report 2012, pg. 95
Determinants of Scale and Speed of North
American Oil Boom
Real Oil Prices Monthly data
Source: Bank of Canada and Haver Analytics Last observation: Oct 2013
1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
0
50
100
1502009 $US per barrel
Real WTI price Real Brent price
Unique U.S. Advantages
Long history of government-sponsored research on
shale gas exploitation
Unique legal and market structures
Plenty of mature infrastructure in place
Constraints on Scale and Speed of North American
Oil Boom
Global Unconventional Oil: Average Production
Cost Curve
26
0
10
20
30
40
50
60
70
80
90
100
0 100 200 300 400 500 600
Global Unconventional Oil: Ave. Production Cost Curve
Liquids from
tight gas*
kerogen oil
Currently Economically Recoverable Resources (billion barrels)
Oil Sands: in situ
Liquids from Shale
Gas*
Extra
Heavy Oil
Shale
Oil
Tightliquids
Oil Sands:
Stand-
alone
Mining
Oil Sands:
Mining &
Upgrading
Source: IEA analysis of Rystad Energy data. Rystad develops estimates based on bottom up analysis of global fields, licenses, and potentially recoverable resources given currently available technology and activity levels. All resource
values depicted in the graph are cumulative expected production from 2012 until 2100, excluding already produced oil
through 2011. Oil and field condensate only, not natural gas plant liquids. Note that for oil sands development costs CERI,
Alberta ERCB, and NEB are used.
Bre
akev
en p
rice
$/bb
l
Source: IEA Medium-Term Oil Market Report 2012, pg. 59
The accumulation of a crude oil glut
Increased production in North America
– Tight oil in the continental U.S.
– Oil sands in Western Canada
In the presence of logistical constraints and legal restrictions, a glut in inventories has emerged
As a result, a gap has opened up between global and North American oil prices
Oil Price Spreads
28
0
50
100
150
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
$US per barrel
Brent - WTI spread WTI - WCS spread Brent WTI WCS
Oil price spreads
Monthly data
Last observation: Nov 2013 Note: November 2013 data is the average of daily data until November 17, 2013.
Logistical Constraints
Dramatic and unexpected increase in North American crude oil production has overwhelmed the existing transportation infrastructure.
Resulting in the accumulation of excess crude oil in the US Midwest,
Between 2010 and 2012, pipeline capacity for delivering crude oil into Cushing increased by more than 800 thousand barrels per day (kb/d), including the 590 kb/d TransCanada Keystone pipeline which carries crude oil from Alberta.
Crude oil inventory in Cushing elevated
30
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
0
10
20
30
40
50
60
Barrels (million)
2008 - 2012 Range 2013 Stock
Cushing crude oil inventory
Weekly data
Last observation: 22 Nov 2013 Source: US Energy Information Administration
Crude oil inventory in Gulf elevated
31
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
125
150
175
200Barrels
2008 - 2012 Range 2013 Stock
Gulf Coast crude oil inventory
Weekly data
Last observation: July 26, 2013 Source: US Energy Information Administration
Logistical Constraints North American Oil Pipelines and Directions of Flow (2005)
Difficult Expansion of Infrastructure Proposed North American Oil Pipelines (2012)
Legal Constraints
Legal constraints have also helped segment the North American oil market – Energy Policy and Conservation Act
– Merchant Marine Act
Price discount required to entice Gulf Coast refiners to process light oils
Industry has overcome constraints by using alternative forms of transportation, the costs of which will influence the continental discount
Implications for the global crude oil market
Effects of Increased U.S. Production
North American oil production unlikely to make a
large contribution to global supply
Optimistic supply scenario implies 8 per cent
reduction in global oil prices
Infrastructure constraints imply downside risks to
growth rate of Canadian production
Shocks to real crude oil prices in response to 30%
increases in US production
37
1 2 3 4 5 6 7 8 9 10
-10
-8
-6
-4
-2
0
%
Years
Percentage shock minus control, quarterly data
Note: This scenario is based on a permanent 30% increase in US crude oil production over 3 years. This translates to a 2.6% increase in global crude supply.
The scenario analysis is done based on a quarterly four-variable structural VAR model, which includes the percent change in global crude oil production, world output growth, the real price of crude oil, and
the change in oil inventories above the ground. For a full description of the original monthly VAR model, see: Baumeister and Kilian, “Real-Time Forecasts of the Real Price of Oil”, Working paper 2011-16.
Source: Bank of Canada
Can the U.S. Experience be Replicated?
Tight oil and gas resources are broadly diversified geographically
Global oil prices are above hurdle rates for global shale extraction
Situation in other countries highlights uniqueness of U.S. experience
– China
LTO production in selected countries in the New Policies Scenario
Source: International Energy Agency World Energy Outlook (2013) and Rystad Energy AS
Change in oil production in selected countries 2012 – 2035 (New Policies Scenario)
Source: International Energy Agency World Energy Outlook (2013)
Conclusions
Conclusion
High oil prices are a blessing in disguise
– Adverse impact on consumers
– New extraction methods
U.S. tight oil experience is unique
Expansion of global unconventional supply is expected to be sluggish
In conjunction with strong expected demand growth, oil prices are expected to remain high
