A tectonic shiftEmerging issues in the U.S. oil and gas industry

ÁNGEL GONZÁLEZ, Dow Jones Newswires

An age of energy scarcity…

• In 2000, the U.S. imported large quantities of Middle Eastern oil– which China also needed.

• Natural gas production was declining fast. Building LNG terminals was a priority to import the needed gas– which China also needed.

• Consumption was climbing fast– it was the age of the SUV and the McMansion.

• Peak oil seemed around the corner.

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Blossomed into an age of abundance.

In 2012, the U.S. is producing more oil at the highest rate in 14 years– taking markets by surprise.

Domestic natural gas production is at record heights– bringing prices to record lows. Imports are irrelevant.

Fuel demand peaked in 2007– in part because of the crisis, but also because of efficiency and biofuels.

Peak oil is not scary anymore.

What happened?

The price of oil and gas went up.

That led to a huge investment boom in all things energy– but not all of the world was open to it.

The U.S. and Canada were.

Money+entrepreneurs+technology+political stability: an oilman’s paradise.

Oilpatch investments (I.H.S. CERA)

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So what does this mean? Companies are busily creating a new energy geography

Pipeline routes are being redrawn to connect new production areas

Pipelines that used to bring imported crude to Oklahoma are being reversed

Energy production is not exotic anymore- it’s part of daily life for many Americans now

So, what does this mean? Part 2

America will halve its reliance on Middle Eastern oil by 2020.

There are potential geopolitical impacts to all this. But they’re unclear at this point

There are also environmental concerns– what is the true cost of this energy revolution?

There are trade, currency and economic impacts too

A story of shifting trends The first to spot one wins.

There’s a world of data available to those who are numerically inclined.

Useful sites: www.eia.gov, www.iea.org, www.opec.org

Also: www.ferc.gov

My favorite: the EIA’s data browser. http://www.eia.gov/oiaf/aeo/tablebrowser/

Trends we’re seeing U.S. importing less and less oil– and more of what it

imports comes from the neighborhood

U.S. becoming a net exporter of fuel

U.S. likely to become an exporter of natural gas

US Gulf of Mexico production took a hit from the Deepwater Horizon, but likely to raise again by the end of the decade

Trends we’re seeing Canadian crude and U.S. crude are likely to fight for

scarce pipeline capacity– until they build more pipelines.

Refining markets are changing drastically– and are bound to keep changing as new pipelines are built

Low natural gas prices are pushing drilling rigs to oil-rich areas.

II. A story of companies Several types of companies are driving the transformation

of American energy.

Integrated oil companies: the largest of the lot. ExxonMobil, Chevron, BP, Shell. They both pump the oil and refine it into fuel. Big Bucks. They want to take the U.S. boom to a global scale.

Independent oil companies: scrappy wildcatters, many of them are now big– Devon, EOG Resources, Chesapeake. They drove the first stage of the U.S. boom.

II. A story of companies Pipeline companies: they are tasked with getting the

new resources to market- for a handsome profit. Kinder Morgan, Enterprise Products Partners.

Independent refiners: until recently endangered, those well-placed are enjoying a lot of cheap U.S. crude. And others are exporting to Latin America. Valero Energy, Marathon Petroleum, HollyFrontier.

Oilfield services companies: the ones who the resource owners hire to do the actual work. The Schlumbergers, Halliburtons, Baker Hughes of the world.

A plethora of non-energy businesses that are booming as a consequence of the energy revolution: railroads, barge operators, truckers, sand mines, guar farms, chemical companies like Dow Chemical.

National oil companies– Asian giants like Cnooc, KNOC, Sinopec and ONGC are scouring the U.S. oilpatch for a piece of the shale game. They also want to take the boom to the rest of the planet.

III. Story of environmental transformation

The environment and health: controversies about whether drilling shale plays contaminates acquifers– especially near populated areas that weren’t used to the industry. That debate is likely to continue for years.

Controversies remain about water use– not only in the shale plays, but also in the oilsands.

Pipeline building is also controversial– remember Keystone XL.

CO2 has left the picture—for now.

IV. A story of social transformation

Social transformation: all this industrial activity brings new money, new jobs, new rivalries. A geographic shift in wealth creation to formerly poor areas in North Dakota, South Texas, rural Pennsylvania.

Parts of the Rust Belt are being revitalized as chemical companies set up facilities and steel makers enjoy cheap energy for the first time in decades..

It’s always a boom-bust story– natural gas activity has migrated to oil regions in the past two years.

Political consequences to this– especially in an election year.

What does the future hold? Nobody knows. That’s what makes it fun.

Crystal balls often shattered by surprises – derailing big, expensive projects and sometimes bringing companies to their knees (and great fortune to others). That makes for dramatic stories.

Keep an eye out for major technology disruptions, geopolitical events, market shifts that could change the future.

Thank you!

Feel free to reach me at angel.gonzalez@dowjones.com.