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Oil boom in US upends markets as drilling spreads
NEW YORK: The US oil boom has put European refineries out of business and undercut West African crude suppliers. Now domestic drillers threaten to roil Asian markets and challenge producers in the Middle East and South America.
Fifteen European refineries have closed in the past five years, with a 16th due to shut this year, the International Energy Agency said, as the US went from depending on fuel from Europe to being a major exporter to the region.
Nigeria, which used to send the equivalent of a dozen supertankers of crude a month to the US, now ships fewer than three, according to the US Energy Information Administration. And cheap oil from the Rocky Mountains, where output has grown 31 percent since 2011, will soon allow West Coast companies to cut back on imports of pricier grades from Saudi Arabia and Venezuela that they process for customers in Asia, the world's fastest-growing market.
"I don't really think anyone saw this coming," said Steve Sawyer, an analyst with FACTS Global Energy in London. "The US shale boom happened much faster than people thought. We're in the middle of a new game. There's nothing in the past that predicts what the future will be."
Advances in extracting oil from shale rock drove a 39 percent jump in US production since 2011, the steepest rise in history, and will boost output to a 28-year high this year, according to the EIA.
While drilling in shale is more expensive than other methods and poses environmental challenges, the prospect of a growing supply is encouraging analysts to predict a more energy-independent nation.
With US exports of gasoline and other refined products hitting a record last month and the country on pace to become the world's largest oil producer by 2015, five years faster than the IEA's earlier predictions, industry advocates such as Sen. Lisa Murkowski of Alaska are calling for an end to 39- year-old restrictions on US crude exports.
In a measure of just how quickly the oil market has changed, President Barack Obama unveiled in March 2011 a goal considered so outrageous that correspondent Christopher Mims wrote on the environmental news website Grist that it could be accomplished only by "an economic crash bigger than any ever seen in US history, or perhaps an alien race forcing all of us to take to our bicycles." Obama said that by 2025 the US would cut crude imports by one-third.
It didn't take 14 years. It took less than three.
The country is so flush with crude that imports are plunging and drillers are challenging export limits imposed after the 1973 Arab oil embargo. Murkowski, the top Republican on the Senate Energy Committee, has called on Obama to end restrictions and vowed to introduce legislation if he doesn't.
Easing controls would have been unthinkable just three years ago, when uprisings in Arab countries such as Libya pushed crude prices over $100, said Philip Verleger, a former director of the office of energy policy at the Treasury Department and founder of the Aspen, Colo,-based consultant PKVerleger.
The boom has been led by drilling in the Permian Basin in West Texas and the oil-rich Bakken shale, which stretches from North Dakota into Montana and Canada.
North Dakota and Texas have more than doubled crude output since Obama's 2011 speech, with Texas pumping more than Iran, according to the EIA, the statistical arm of the US Energy Department, and a Bloomberg survey of producers, oil companies and analysts.
Drilling is spreading in emerging oil fields in the Rocky Mountain region such as the Niobrara in Colorado and the Bone Springs in New Mexico and spurring a revival of crude extraction around Wyoming's Teapot Dome formation, home of the first US reserves and the namesake of a 20th century political scandal. Colorado's production jumped 17 percent in the first 10 months of 2013, Wyoming rose 16 percent and New Mexico added 10 percent, according to the EIA.
A record amount of crude is already riding the rails from oil fields in North Dakota, Colorado and New Mexico to California's fuel makers, according to the California Energy Commission. Companies looking to ship even more include Tesoro Corp., Valero Energy Corp. and Plains All American Pipeline, which are planning to build train terminals in California and Washington state, according to company statements and regulatory filings. Plans are awaiting permits or in the planning stages to handle capacity roughly equal to the amount of crude sent to the region by Saudi Arabia.
If the railway networks on the West Coast are completed, the region's refiners will be able to use domestic crude supplies to boost exports to meet rising needs in Asia, where demand for new cars, electricity and air conditioning is boosting energy consumption.
China, already the world's largest importer, will rely increasingly on crude from the Middle East and refined fuels from the US.to meet its consumers' growing demand.
An increase in the number of US cargoes to Asia might force Saudi Arabia to cut its output to head off a worldwide glut, Verleger said.
As the de facto leader of the Organization of Petroleum Exporting Countries, Saudi Arabia is monitoring signs of potential oversupply as Iraq and Libya try to boost output and Iran increases exports as international sanctions are loosened, he said.
"It's another outlet for North American oil products and means more supply for the rest of the world," said Andy Lipow, president of Lipow Oil Associates, an energy consultant in Houston.
"The West Coast is behind the rest of America as far as getting crude by rail. It will increase supply and help the consumer."
The US gains were made possible by innovations in horizontal drilling and hydraulic fracturing, or fracking, that have unlocked fuel trapped in underground rock.
The technology allows producers to bore horizontally, then use explosives and a high-pressure stream of water, sand and chemicals to blast open fractures that free the oil.