Rising production of shale/tight oil in the U.S. coupled with dropping demand is creating a situation in which U.S. crude imports are rapidly declining—a complete reversal of the view held a few years ago that U.S. imports would increase over time. In addition, Canadian oil-sands heavy crude production is set to grow rapidly; according to Hart Energy's 2013 heavy crude analysis, Canadian heavy oil production will increase from about 1.7 million barrels per day (bbl/d) in 2012 to nearly 6 million bbl/d by 2025. This is driven primarily by the large number of new oil-sands projects being developed, with about 30 new projects starting between 2015 and 2020 and another 30 projects between 2020 and 2025.

While we don't see the U.S. becoming “energy independent” in terms of crude oil, it is possible that imports from outside of North America will decrease to very low levels before the end of this decade.

Currently, all Canadian heavy oil is processed in Canada or the U.S., with the latter taking most of it. The U.S. will continue to process it up to the point where production exceeds U.S. demand. As production increases, Canadian crude will quickly displace heavy crude imports from other regions, while tight oil will displace light and medium crude imports.

In the graph below, the aggregate of Hart Energy's U.S. tight-oil forecast and the Energy Information Administration's U.S. conventional liquids forecast is compared with crude demand (blue line), indicating that net imports (the red line) will drop quickly to below 2 million bbl/d by 2020. The graph also shows Canadian heavy crude exports (purple line) will exceed the U.S. import demand by 2018. Afterwards, Canada will be required to export heavy crude to destinations outside North America or face a situation in which production growth will be curtailed.

Getting oil sands crude to the coasts where it can be exported will present another set of challenges. Today, there are no pipelines from Alberta, where the oil sands are located, to the West Coast. A gas pipeline to the East Coast may be converted to heavy crude service, but more export capacity will be needed. Rail offers a flexible means of transporting crude oil and could be employed to move Canadian crude to ports where it could be exported.

The current situation will affect not only North America but also global heavy crude exports. With the U.S. no longer being the primary destination for exported heavy crude, these barrels will have to find a home elsewhere. And, with Canadian heavy crude being exported outside of North America, global heavy crude on the export market will increase well beyond what was envisioned even two years ago.

What will be the destination of this heavy crude? With no other growing market for crude imports, the bulk of the exported heavy crude will go to Asia, mostly to China and India. This has major implications for the Asian refining sector, which will need to add coking capacity and other equipment to handle increasing volumes of heavy high-sulfur crude oil.

The scenario portrayed here depends on two key assumptions. First, sufficient Canadian crude will make its way to the U.S. either through new pipelines such as the Keystone XL or by rail, where it will displace heavy crude imports from other countries. Second, it assumes the current ban on crude oil exports from the U.S. remains in place.

This is not necessarily the most economically efficient outcome. Light crude from shale and tight-oil production will create inefficiencies in U.S. refineries, especially those in the Gulf Coast, PADD 3. If the export ban were not a factor, the U.S. could export some of its light crude and continue to import medium and heavy crudes. This cannot be ruled out, so stay tuned—what seems inevitable today may be completely reversed by a change in law tomorrow.

For more on liquids supply and demand, see OilandGasInvestor.com.

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