• Is US Energy Independence On Its Way?

    07/02/19 | Stacey Morris

    Summary //

    • The US is knocking on the door of achieving energy independence by becoming a net energy exporter.
    • Even as the US achieves energy independence and becomes a leading energy exporter, some energy imports will still be required.
    • The combination of growing domestic production and rising exports is not just a recipe for energy independence but also creates a strong fundamental backdrop for midstream.

    US energy independence carries different meanings depending on each person’s views and experiences. History buffs may be reminded of a speech from President Nixon during the 1973 oil embargo. Energy industry stakeholders likely think of growing US oil and natural gas production. Others may think of energy independence in the context of needing more renewable energy solutions or greater energy efficiency. Depending on your view, the term US energy independence may connote a patriotic aspiration, a political buzzword, or an impossible feat.

    In this piece, we discuss the different definitions of energy independence, US progress towards this milestone, and the role of US oil production in achieving energy independence. If we define energy independence as becoming a net energy exporter, the US is poised to become energy independent next year. However, the positive outlook for US energy production growth and rising exports goes beyond merely achieving energy independence.

    What does energy independence mean?
    Energy independence is open to interpretation. For many, energy independence means exporting more energy than we import. Others take a stricter view and argue that energy independence means the US is totally self-sufficient for energy and imports are nil. This energy self-sufficiency was generally the case for the US prior to the 1950s. Clearly, a lot has changed since then with US energy consumption, among many other things (try finding a poodle skirt at your local mall).

    If we use the relatively lower hurdle – though still impressive feat – of exporting more energy than is imported, the US is knocking on the door of energy independence. On the other hand, the likelihood of the US importing zero energy and achieving energy self-sufficiency seems highly unlikely for the foreseeable future (discussed more below).

    How close is the US to energy independence (based on net exports)? Pretty close.
    As we discussed in our July Fourth post from last year, the US energy landscape has been completely revolutionized over the last decade. The US became the world’s largest producer of natural gas in 2009, and the world’s largest producer of oil last year, not to mention other milestones shown in the timeline below. Rising domestic production of oil and natural gas has led to lower imports and growing exports, driving a decrease in total net imports. According to the Energy Information Administration (EIA), total net energy imports in 2018 accounted for a modest 3.6% of total energy consumption – the lowest percentage in over sixty years. In its Annual Energy Outlook 2019, the EIA projects that the US will become a net energy exporter in 2020. Key to achieving energy independence have been changes in oil production and trade.

    Shifting dynamics with oil essential to the US becoming a net energy exporter.
    Oil has been the primary culprit in keeping the US a net energy importer. Oil imports have declined significantly in recent years as shown below, but the US still imported nearly 7.8 million barrels per day (MMBpd) of crude in 2018. To put that volume into context, Permian oil production averaged ~3.5 MMBpd last year. In other words, the US was importing more than twice as much crude each day as was produced in the Permian.

    Importantly, the quality of crude imported differs significantly from what is produced in the Permian or other US shale plays. Nearly 60% of US crude imports in 2018 had an API gravity of 25.0 degrees or less, whereas the benchmark crude in the Permian, WTI Midland, has an API gravity of ~43 degrees. Essentially, complex US refiners require heavy and medium crudes, while much of the oil produced from US shale plays is light. For this reason, incremental growth in US oil production is expected to be largely exported, while heavier grades of crude will continue to be imported.

    US refiners’ demand for heavy crude is just one example of why US energy self-sufficiency (i.e. zero imports) is unlikely for the foreseeable future. Another example includes needed imports of refined products to the East Coast, which is short on refining capacity and will have even less capacity given the announced shutdown of the Philadelphia Energy Solutions refinery last week following a recent fire. Imports of natural gas from Canada for states along the northern border are also likely to persist.

    Beyond energy independence.
    With growing energy production and rising exports, the achievement of energy independence on a net-exporter basis seems inevitable for the US, but the story doesn’t end there. The US is poised to become a leading energy exporter to the rest of the world. The International Energy Agency (IEA) projects that the US will export more oil (including natural gas liquids) than Russia in 2024. This would imply US exports of nearly 9 MMBpd! The outlook for natural gas exports is also robust, with the IEA forecasting that the US will become the world’s largest exporter of liquefied natural gas (LNG) in 2024.

    What does energy independence mean for midstream?
    The combination of growing domestic production and rising exports is not just a recipe for energy independence; it also creates a strong fundamental backdrop for midstream companies. These market dynamics require more energy infrastructure – pipelines to move hydrocarbons to the coast, natural gas processing facilities, and export terminals. The fundamental thesis for midstream remains that energy infrastructure will play a vital role in connecting growing domestic energy production with rising global demand, which midstream will facilitate while collecting fees under long-term contracts, generating cash flows for investors.