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September 2013
Geopolitical implications of North American energy independence
(Abridged sample version)
Executive Summary
North America has long been a hub of world energy trade, but net imports are falling, and will continue
to fall. After 2020, North America will become a net energy exporter. In Btu terms, the region will be
energy independent, but the United States will remain highly exposed to international oil prices for the
foreseeable future. North America will also be dependent on external markets to absorb excess local
production. As a result, the region will remain a key participant in world energy markets regardless of its
position on the import-export spectrum.
The impact of this change is already being felt on global energy flows. Qatari LNG has been diverted
from North American export destinations and has found itself competing with Russian piped gas in
Europe. North American coal is finding its way east across the Atlantic. North American imports of light
sweet (LS) crudes have plummeted.
Over the next few years, North America’s energy independence will reshape, but not redefine, global
geopolitics. The Middle East is most sensitive to changes in oil flows. Under pressure to maintain oil
revenues, and with Asia importing ever-greater volumes, the relationship between China and the key
players of OPEC will become increasingly bilateral. As a result, the strategic interests of China and the
US in the Gulf will become more aligned. Tight oil will not divorce US foreign policy from the Middle
East.
Pressure on Russian gas exports, forced by North American shale gas, has led to a re-evaluation of the
strategic need to open Pacific basin markets. Russia is already pivoting towards China, in a
development which reverses the historic trend of limited engagement between the two countries.
An energy-independent North America will also introduce a new dynamic to coal, oil and gas prices.
During periods of high demand, coal exports will establish a price cap on the Pacific market. Gas
exports will act in a similar fashion and North American LNG could cap gas prices throughout the world.
Given weak oil demand growth, US tight oil will provide a price floor under crude markets, as production
slows until drilling economics once again become commercial.
China’s further development as the world’s largest energy importer will determine the trajectory of
global demand growth and hence price movements under this new reality. It will be this development
which will also determine the precise nature of the geopolitical impacts of an energy independent North
America.
Geopolitical implications of North American energy independence
The fundamentals of North American energy independence
As a producer, consumer, importer and exporter, North America (defined in this Insight as Canada, the United States and
Mexico) has long been a primary hub of world energy trade. Net imports of coal, oil and gas peaked in 2005, and have
since been on a steep downward trend. Until 2009, this change was driven by oil demand. Energy demand will
eventually recover from post-crisis lows and stabilise at approximately 2008 levels through the 2020s. This combination
of factors means North America’s net energy trade position becomes driven by continental production, rather than oil
demand. Net imports will continue to fall, and by 2020 North America will become energy independent. Beyond, the
region will become a net exporter.
Net Trade (quad. Btu)
3
2
1
0
-1
-2
-3
-4
20
15
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10
5
2000
2004
Net Trade (LHS)
Net Trade change
Source: Wood Mackenzie
y.o.y change (quad. Btu)
25
NA coal, oil, gas production 2000 – 2012
Production (quad. Btu)
NA Energy balance, balance change and oil demand
2008
2012
Oil Demand change
30
29
28
27
26
25
24
23
22
21
20
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2000
2004
Coal (LHS)
2008
2012
Oil (LHS)
Gas (LHS)
Source: Wood Mackenzie
Energy balance defined as net trade of coal, oil & natural gas
45
…driving energy independence by 2020
3
2
35
1
30
25
0
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20
-1
15
-2
10
-3
5
Net Trade (quadrillion Btu)
40
30
y.o.y change (quad. Btu)
Production (quadrillion Btu)
Supply growth will continue through to 2030…
25
20
Net Imports
15
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10
5
0
-5
0
-4
2005
2010
2015
2020
2025
2030
Gas (LHS)
Oil (LHS)
Coal (LHS)
Production change (all)
Net Trade change
Source: Wood Mackenzie
-10
Net Exports
-15
-20
2005
2010
Gas
2015
Oil
2020
2025
2030
Coal
Source: Wood Mackenzie
Trade versus energy independence
However, North America will become ‘value independent’ (i.e. the cost of energy imports will equal the revenue from
energy exports) by approximately 2023, a few years after energy independence is achieved. A significant proportion of
Canada’s exports will flow into the United States, but the US will remain highly exposed to international oil prices for the
foreseeable future.
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Geopolitical implications of North American energy independence
North America trade value independence in 2023…
…but United States a net buyer of oil until beyond 2030
Net Trade Value (US$ Bn)
Trade Value (US$ Billion 2000 Real)
400
350
300
250
200
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150
100
500
400
300
200
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100
0
-100
-200
50
-300
0
2005
2010
2015
2020
2025
2030
-50
-100
2005
2010
2015
2020
2025
2030
Net Trade Value
Source: Wood Mackenzie
United States Oil
United States Gas
Canada Oil
Canada Gas
Mexico Oil
Mexico Gas
United States Coal
Canada Coal
Source: Wood Mackenzie
Furthermore, North America remains a participant in world markets regardless of its position on the import-export
spectrum. Today, it is dependent on imports to satisfy demand and maintain security of supply. By the 2020s, North
America becomes dependent on external markets to absorb excess local production.
Independence will redefine global energy flows
The decline and eventual reversal of North American net trade will have complex impacts on global energy flows, some
of which are already becoming apparent. Longer-term, the rebalancing of energy imports to Asia will be facilitated by the
emergence of North America as an energy exporter. Both emerging and established energy producers will be affected.
The impact of North American unconventional gas supplies has already been dramatic. Qatari LNG cargoes, from
projects developed for export to North America, have been diverted elsewhere, including Europe. Meanwhile, gas
demand in Europe has been effectively stagnant since the Great Recession. Qatari LNG has therefore been competing
directly with Russian piped supplies in the European marketplace, contributing to the oversupply that is tipping the
market away from a reliance on oil-indexation priced contracts typically offered by Gazprom, and towards more spot
pricing. As a result Russia has reduced its target price for gas into Europe and is seeking alternative markets for new
supply, notably in Asia. Russia has also had to shelve plans to send its own LNG to North America. Qatar, on the other
hand, is now seeking to export LNG from the US, rather than developing more LNG from its domestic fields.
North America’s coal market (dominated by the US) has traditionally been an insular one. While there have been
sporadic imports and exports in the past, the market has been largely self-sustaining. An energy-independent North
America implies a dramatic change to this traditional position. Demand is falling in the power sector, driven by the
emergence of new gas supplies. As this market shrinks, North American coal producers are being forced to think about
international trade in a fundamentally different way. For most, the reality will be export, or die trying.
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Some
North
American
is already
finding to
its subscribers
way across the
Atlantic, to capitalise on healthy dark spreads in Europe.
We assume this pattern is transitory, and will fade once European coal burn becomes increasingly constrained by
legislation such as the Large Combustion Plant Directive (LCPD). Instead, producers will seek to ship volumes to the
large Asian markets of China, Japan and India, with the Pacific coasts of Canada and the United States becoming key
export points.
In Japan, buyers are seeking an alternative to Australian tonnages, however Powder River Basin (PRB) coal is a lower
specification than typical Newcastle volumes. To back out significant Australian cargoes, US coal producers would have
to see Japanese power utilities reconfigure generation capacity accordingly, a process which could take many years.
Elsewhere, buyers are less tied to Australia. South Korea, for example, is already taking some PRB coal. US coals could
also compete with Russian shipments in China. Russian coal has a cost advantage, but as in the US, rail infrastructure is
often a bottleneck.
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Geopolitical implications of North American energy independence
North America energy exports by destination, vs. net imports (all fuels) 2005 – 2030
30
Net Trade (quad Btu)
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10
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0
-10
-20
-30
2005
2010
2015
2020
2025
NA to China
NA to E Europe
NA to ME
NA to N Africa
NA to NE Asia
NA to S America
NA to S Asia
NA to West CIS
NA to W Europe
Imports to NA
2030
NA to S Africa
Source: Wood Mackenzie Global Energy Balance Model
North American tight oils are predominantly light sweet (LS) crudes, imports of which have plummeted in the last few
years. As imports decline, LS volumes are being backed out from West Africa and the North Sea. Nigerian volumes
initially bound for the US Gulf Coast have been diverted, to destinations in China and South Korea. Direct imports from
the Middle East will fall, but North American refineries will continue to demand the heavy sour (HS) barrels characteristic
to Latin America and Gulf State producers, and this will have a key role in defining future energy geopolitics.
Additionally,
crude from
suppliers
developing
export
focused
on North America will increasingly look for markets
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elsewhere. Brazilian NOC Petrobras has stated that growth in oil exports will be now directed at China, because of the
rise of US tight oil. Shifts such as these place additional pressure on the Middle East, as a variety of producers begin to
look for market share in areas traditionally dominated by Saudi Arabia.
Our base case view maintains the US ban on crude oil exports (except to Canada). However, the US is able to export oil
products, and a change in the product balance is a key element of the North American energy trade story. The high
refining margins the United States enjoys, coupled with declining domestic demand, means the country has the ability to
push petroleum products to almost any part of the world. Incremental product barrels could be pushed as far west (into
Asia) as possible, putting these volumes in direct competition with product producers in the Middle East, who are in the
process of building export-focused refineries. Caught in the middle will be Europe, which is faced with declining demand,
and lacks the feedstock advantages of North America and the Middle East.
Geopolitical impacts will be subtle but significant
The geopolitics of energy have played a defining role in world history since the oil shocks of the 1970s. In many cases,
the trade in energy and the political relationship between importer and exporter is impossible to separate. North
America’s energy exports will reshape these relationships, but will not redefine them.
Of the emerging supply regions, Africa is likely to suffer the most from changing oil flows. If tight oil puts downward
pressure on LS crude prices, this will have the side effect of delaying economic and social development in Africa. West
African producers would have to endure lower realisations if they are forced to Asia to find markets for their output. The
result would be lower revenue, and less development money.
The Middle East is more sensitive to oil revenues than any other producing region. Social obligations (such as
burdensome energy subsidies) must be funded by a trade portfolio which is not optimised or diversified. Since the Arab
Spring, the ability of Middle Eastern governments to rein in these programmes has been weakened. We therefore
assume they will continue for the foreseeable future, in order to maintain – or attempt to maintain – social stability.
With the Middle East under pressure to maintain revenues, and Asia importing ever-growing volumes of oil, the
relationship between China and the key players of OPEC will become increasingly bilateral. China is likely to want
increasing influence in the Middle East, but without a navy comparable to that of the US, it will have to find non-military
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Geopolitical implications of North American energy independence
channels. These may be infrastructure investments or social programmes. Additionally, China does not have the foreign
policy restrictions the US has, enabling the development of relationships with Iran.
A market for Middle Eastern HS barrels will persist in North America. Additionally, the US still has obligations to its allies
in Asia (Japan, Korea and Taiwan). So, while the US may not welcome increased Chinese involvement in Iran, overall
the strategic interests of China and the US in the Middle East will become more aligned in terms of ensuring that the
region remains stable. Tight oil will not divorce US foreign policy from the Middle East.
The dramatic
change
in Russia’s
export position,
forced by
North American shale gas, has led to a re-evaluation of
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the strategic need to open Pacific basin markets - particularly pipeline exports to China, with projects proposed in both
western and eastern Russia. Despite the compelling reasons to agree a pipeline export deal with China, progress has
been slow, but momentum has built in 2013, with an MoU signed in March 2013 from Russia’s east Siberia gas fields. In
addition, CNPC has for the first time taken an upstream position in Russia, signalling an improvement in energy relations.
Energy independence and price dynamics
An energy-independent North America will introduce a new dynamic to coal, oil and gas prices. During periods of high
demand, North American coal and gas exports will establish a price cap on their respective markets. During periods of
weak growth, US tight oil will act to create a price floor.
US coal suppliers find themselves in a precarious position. They face an inexorably shrinking domestic market, but the
promise of robust international trade largely predicated on strong, steady growth in China (and, to a lesser extent, India).
But if China’s coal demand does not grow to currently forecast levels, this would act to reduce the opportunity for North
American producers in these new Asian markets. Given the challenges to developing port capacity in the environmentally
sensitive Pacific Northwest, and the delays and cancellations that have already occurred, the infrastructure investment
required to capitalise on future Asian demand is not for the faint of heart.
Yet US producers and their associates are proceeding with these investments, despite the risk that Chinese and Indian
demand does not develop as hoped, because the alternative is to chase dwindling US volume. For large PRB suppliers,
the risk of not seeking better access to the Asian market is less palatable than the risk of overwhelming the market with
too much coal and putting downward pressure on prices. Should China’s demand growth fulfil expectations and drive
prices high enough to bring US coal to Asia, these cargoes will become the price setters for the Pacific market.
Alternative suppliers will be unable to breach this cap, because potential volumes from the US are large enough to
satisfy any realistic demand projection from Asia.
140
18
16
120
14
100
12
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60
10
8
6
40
4
20
2
0
US$/mmBtu (2012 Real)
US$/bbl (2012 Real)
Coal prices, 2012 – 2030
US$/T @ 6,300 kcal/kg (2012 Real)
Oil & Natural gas prices, 2012 – 2030
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130
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110
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100
90
80
70
0
60
WTI (LHS)
HH (RHS)
Brent (LHS)
Japan (RHS)
Source: Wood Mackenzie Macro Oils Service; Global Gas
Service
FOB Newc.
CFR ARA
FOB RB
CFR S China
Source: Wood Mackenzie Coal Markets Service
North American gas exports will act in a similar fashion, and the potential for yet more LNG from North America will cap
gas prices throughout the world. While LNG remains a capital-intensive and expensive product, the enhanced
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Geopolitical implications of North American energy independence
competition for LNG supply fostered by the emergence of North America as a gas exporter has placed LNG buyers in a
stronger position than they have been for several years. Once shipping costs are factored in, Henry Hub-indexed LNG
delivered to Japan or China may not be ‘cheap,’ but it has introduced additional competition into the global gas market
and forced suppliers to re-consider pricing tactics. Prior to the North American shale revolution, ministers from gas
resource nations as diverse as Russia and the Netherlands talked of moving towards oil parity pricing for gas. Buyers no
longer hear this rhetoric today.
US tight oil can act as a floor price in that a global oil price below US tight oil break-even prices would reduce US
investment, resulting in production growth slowing, or output beginning to fall. The loss of US tight oil production would
return US oil demand to the world market, putting upward pressure on global oil prices until US tight oil drilling economics
become commercial.
For
core removed
tight oil plays
the US,–the
supply correction
mechanism
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only would require a period of sustained low oil prices for
over a year, after which production would be affected by slowing growth, which would rebalance the market. Although
prices for West Texas Intermediate have been affected much more by the emergence of US tight oil, due to the
restrictions on crude oil exports and transportation constraints, unconventional supply has already acted to prevent
prices from rising sharply when there have been supply curtailments from other producers. We expect increasing US
tight oil supplies to continue to add stability to the global oil market, rather than remove it.
Conclusion
Alongside the arrival of China as the world’s largest energy consumer, the growth of unconventional gas and tight oil in
North America is the most significant development in global energy markets in a generation. For natural gas alone, the
speed and magnitude of the switch from importer to exporter status has been enough to upset LNG flows only recently
established to serve a growing North American market. Volumes of unconventional gas being produced are such that US
coal is being driven from traditional domestic power generation markets and being forced to find buyers in Europe and
beyond. Tight oil is already diverting LS crude imports away from North America, and raises the prospect of the US Gulf
Coast becoming an oil product exporter to rival the Middle East.
By 2020, North America will become energy independent; afterwards it will be a net energy exporter. But energy
independence does not imply a North America entirely detached from global markets. On the contrary, the region as a
whole will be dependent on others to clear excess production, and the United States will import oil for the foreseeable
future. This alone will moderate the geopolitical impact of the changing North American trade position, ensuring there is
no chance of an energy isolationist, rather than energy independent continent.
But the geopolitical impacts of an energy independent North America cannot be fully understood without considering the
rise of Chinese energy demand. Imports into China will grow as those into North America fall and eventually reverse.
While North American exports will provide boundaries for coal, oil and gas prices, it will be the trajectory of China’s
import demand that determines when these barriers are tested. China will assume greater responsibility in the Middle
East, but it will be in partnership with the United States, rather than instead of it. China will also provide an outlet for
Russian energy exports from the east of the country, and in doing so help to develop a relationship between two nations
with little history of cooperation.
North America’s changing energy balance is already altering global geopolitics, but the precise nature of these impacts
will be influenced by an increasingly import dependent China.
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Global Horizons Service Risks Uncertainties Insight - September 2013
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