Our Insights column in the January 2012 issue highlighted analysis from Hart Energy Research and focused on the future impact of unconventional oil supply from shale-oil plays and Canadian oil sands (synthetic crude oil). For the crude balance in the U.S. Gulf Coast (USGC), we suggested the potential for “U.S. oil exports” resulting from the large volumes of light crude oil we expect to be available relative to demand. Instead of “oil exports,” we should clarify that our analysis suggests an “oversupply” of light crude could be available to refiners in the USGC, given our current forecasts for supply and demand.

In addition, challenges which include export licensing requirements and the cost of transporting crude via waterborne vessel would more than likely lead to increased refinery utilization rates in the region and refined products being transported in this scenario.

This month’s column draws from our previous article, with a specific focus on Hart Energy’s upstream analysis. We provide an overview and supply forecast for the Canadian oil sands (COS) and “oily” shale plays in North America (Hart’s “oily” plays include the Bakken, Eagle Ford, Niobrara, Permian Tight Oil, the Utica, and Cardium).

Utica Niobrara Permian Tight Oil Eagle Ford Bakken Cardium Canada Light SCO Canadian Heavy Crude Oil

In 2011, unconventional Canadian oil-sands production was estimated to be 1.5 million barrels per day (MMbbl/d) of diluted bitumen and heavy synthetic crude oil (SCO) and about 570,000 bbl/d of light SCO derived from oil sands and extra-heavy oil. Hart Energy expects oil-sands production will increase to 3.5 MMbbl/d of diluted bitumen plus light SCO by 2020, representing one of the largest growth areas outside of OPEC.

With only a few Canadian and Midcontinent refiners expanding their capacity to process additional COS supply, this represents a small segment of demand compared to the large volumes expected to come on-stream in the future. Instead, this supply will be needed in the USGC, where refiners are expanding capacity and already import heavy crude oil from places like Venezuela and Mexico, which are both uncertain sources of future supply.

Shale oil has also emerged as a game-changer for U.S. supply, offsetting decades of decline in U.S. oil production. International oil companies, national oil companies, and large independents have all made huge investments in the development of shale plays in the U.S and Canada. Investments were initially focused on the development of unconventional gas, which at the time offered companies attractive long-term returns, and were an effective way to improve reserve-replacement ratios compared to alternative investment opportunities.

Major advancements in horizontal drilling and fracing techniques followed and provided access to resources that were previously inaccessible. The “oversupply” of natural gas has depressed prices, with Henry Hub prices trading at their lowest level in a decade, $2.50 per MMBtu at press time. Most analysts call for prices to remain in the range of $4 to $6 per MMBtu for the next five years.

With oil prices remaining at record-high levels, so too has the oil-to-gas-price ratio, shifting the primary focus of most U.S. operators to the development of shale-oil plays. The North American Shale Quarterly, published by Hart Energy, expects combined production from the oily shale plays to reach 2 MMbbl/d by 2020, rivaling the growth expected from COS. Considering the average price for West Texas Intermediate was $95 per barrel in 2011, and Hart Energy’s 2012 forecast calling for prices to average $96, $20 above the highest breakeven oil price for any of the oily shale plays, we feel confident that high oil prices will facilitate additional investment.

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