Since the end of World War II, the United States had become increasingly dependent on international supplies of crude oil to fuel its growing economy and its burgeoning modern lifestyle. As it imported greater supplies of oil, primarily from the Middle East, it had to invest trillions of dollars and thousands of lives to protect its interests in these permanently unsettled regions. Soon, this policy will become a thing of the past.
The North American energy complex is undergoing its most important technological revolution since the 1950’s. Game changing technology, invented and developed on this continent, is rapidly re-shaping the North American energy equation which could lead to startling global geo-political shifts.
By employing multiple staged hydraulic fracturing (fracking) in horizontal wells, the energy industry has gained access to trillions of cubic feet of natural gas in tight shale rock, previously thought to be unproductive. Massive new natural gas reserves have been brought on-stream in both the US northeast (Marcellus formation) and in Texas (Eagle Ford and Barnett shale’s). In 2010, the United States surpassed Russia as the world’s largest natural gas producer, and is poised to become a net exporter. Dramatic increases in natural gas production utilizing this technology have also occurred in western Canada, with shale gas development in both northeast BC and northwest Alberta.
North American producers have been so successful in developing new natural gas reserves, that they have swamped demand, and driven prices down to their lowest level in over a decade. While this has been terrific for both consumers and the economy, it has been negative for investors in natural gas producers. The solution to natural gas over-supply likely lies in the successful conversion of some of the North American transportation industry from oil-based fuel to natural gas.
The technology that swept the natural gas industry is now doing the same for oil. Multiple staged fracking technology has more recently been applied to tight rock oil reservoirs, with similar success. This is the “game changer”. For example, light oil production from the Bakken formation in the Williston basin (North Dakota, Montana, and Saskatchewan), will one day approach 2.0 million barrels per day, up from a standing start just a decade ago. North Dakota is expected to become the second largest oil producing state (after Texas) within the next few years. Oil and gas companies are re-drilling and fracking old oil reservoirs throughout North America and generating similarly dramatic increases in recovery rates.
As a result of this innovative technology, in concert with the ongoing development of Canada’s oil sands, BP predicts that North America will become fully energy self-sufficient by 2030, a mere 18 years away. A contributing factor is declining demand, as high prices have caused North Americans to embrace a degree of energy conservation, particularly with regards to vehicle use.
To achieve BP’s prediction of energy self-sufficiency, several events have to occur. First, the oil and gas industry will have to work with government and regulators to ensure that the risks of hydraulic fracking are managed and minimized. Second, the Canadian oil sands expansion plans have to continue, with the attendant need to increase pipeline capacity required to bring that production to market. Third, the oil sands producers must work to effectively address genuine environmental concerns. Fourth, an effort has to be made to transition part of North America’s transportation fleet from gasoline and diesel fuel to natural gas. Lastly, conservation must continue to be part of the equation.
While these developments are exciting for North Americans, the energy industry, and foreign policy advisors, how do we benefit from this as investors? Game changing environments lead to both opportunities and pitfalls. To date, we have avoided the pitfall of owning any natural gas producers, which have suffered from over-supply and low prices. We have emphasized owning oil levered producers, which are enjoying relatively strong pricing for now. Will this continue? This is an issue that will require our vigilance. We own some pipeline companies that are benefitting from the expansion of capacity required to carry increased production. We are exposed to some companies involved in the development and provision of hydraulic fracking services. It is technological development that has driven this revolution. Like most ground-breaking technologies, this was invented right here in North America. In our view, there will be further opportunities for investors as this technology is exported and implemented in the rest of the world.