The Ukraine, Libya and Iraq are a long way from the Bakken and the Alberta Oilsands. But events half a world away are shaping North American energy opportunities. In a remarkable transformation the United States is moving steadily and swiftly from the world’s major oil importer to an exporter of oil and natural gas. Both Canadian and American economies will benefit highly from this trend, through lower energy costs, job creation and security of supply.
The turmoil in the Middle East has rapidly expanded from Syria to a resurgent war in Iraq. Now Israel and Hamas are engaged in violent conflict that may spread beyond a low level skirmish. The declaration of an Islamic Caliphate by the deadly ISIS group is a further threat to stability and to oil production in Iraq and Kurdistan. In Libya oil production is once again collapsing under the pressure of violence. Heightened tension and violence between Russia and the Ukraine also pose challenges for the supply of energy – largely natural gas to Europe. Mexico and Venezuela, once major oil suppliers have allowed their production to decline through failed policies and management.
The cumulative impact is increased uncertainty of oil supply from these conflict-ridden regions to the rest of the world. This reinforces the virtue of North American energy development. Pair this with the invention and rapid application of new drilling technologies – horizontal drilling and multistage fraccing – and spectacular production growth is the end result. In the past five years, U.S. oil production has grown from 4 million barrels a day to nearly 9 million barrels a day. Canada’s production has also increased from 2.5 million barrels a day to nearly 4 million barrels a day. Combined North America’s oil production now exceeds 12 million barrels a day. If you include liquids such as propane, ethane and butane this number jumps to the equivalent of 15 million barrels a day. This is within striking distance of the 20 million barrels a day North America consumes.
Further, in 2010 the US surpassed Russia and became the largest producer of natural gas. Taken together, North America is now the largest producer of both oil and natural gas globally.
Over the next 15 years, over a trillion dollars in energy infrastructure investments will be required in North America. The first phase will be investments in domestic processing and transportation infrastructure to move energy from producing to consuming regions. The second phase will be large investments to export energy internationally. This spending supercycle will lead to strong profits for companies building: pipelines, midstream, storage, transportation, rail, LNG/CNG, industrials and other energy services.
This influx in spending presents a compelling investment opportunity. It is safest and more stable on the infrastructure side. Although tempting to invest in the “high-flying” exploration and production companies, they are volatile, slaves to even small fluctuations in oil and gas prices. The infrastructure companies are far less affected by commodity price changes due to the nature of their contracts. They benefit directly from production growth.
Political turbulence abroad combined with new technologies domestically is catapulting North America from energy dependence to independence. This is only the early stage for North America’s energy resurgence. Becoming a leading exporter of energy will emerge as the more important goal and will underpin a return to American energy leadership on the world stage.
Genevieve Roch-Decter, CFA, Portfolio Manager
North American Energy Infrastructure Fund
LDIC Inc.
Michael Decter, President & CEO, Portfolio Manager
North American Energy Infrastructure Fund
LDIC Inc.
(Source: LDIC Inc.)