WoodMac: Unconventional production changing energy trade patterns

North America will become energy independent by 2020 and will become a net energy exporter, Wood Mackenzie Ltd. researchers said, adding that they expect the US and Canada will remain key participants in world markets.

“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,” said Paul McConnell, WoodMac senior analyst for global trends.

“Qatari LNG has been competing with Russian piped gas in Europe, North American coal is finding its way east across the Atlantic, and North American imports of light sweet crudes have plummeted,” he said.

WoodMac expects North America’s energy independence will reshape but not redefine world geopolitics. The emergence of tight oil will not divorce US foreign policy for the Middle East, WoodMac said, adding that it expects the strategic interests of China and the US could become more aligned.

“The Middle East is the most sensitive to changes in oil flows,” McConnell said. “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.”

Effects of shale gas

The emergence of shale gas development, primarily in the US, has prompted a reevaluation of the strategic need to open Pacific Basin markets to gas exports.

“Russia is already pivoting towards China in a development which reverses the historic trend of limited engagement between the two countries,” McConnell said. “The key component of this strategic shift has been pipeline exports to China, with projects proposed in both western and eastern Russia.”

North America’s energy independence also will influence coal, crude oil, and gas prices according to WoodMac. Coal and gas exports will establish a price cap on their respective markets during high-demand periods.

Weak oil demand growth will see US tight oil provide a price floor under crude markets.

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, WoodMac forecasts.

Rising Chinese energy demand is expected to mean escalating energy imports for China.

“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,” McConnell said.

WoodMac emphasized 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 US will be an importer of 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 an energy independent continent,” McConnell said.

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