Challenges Lie Ahead For North American Oil Production

At a time when Russia is saber-rattling and the Middle East is in turmoil, a welcome geopolitical trifecta could be in the making. The United States is poised to surpass Saudi Arabia and Russia as the world’s top oil producer. Canada’s oil sands have vaulted the country to energy superpower status. Mexico is embarking on a historic constitutional energy overhaul that its president promises will propel the country’s economy.

But as bright as the future may appear, energy executives and other experts say it is time for a reality check before declaring energy independence for the United States and its continent. Gushing oil and gas give North America hopes of becoming what some call "Saudi America," but fossil fuels development is always contentious for its environmental costs. The Keystone XL pipeline, intended to connect Canada’s oil sands to American refineries, has been tangled in politics and regulatory concerns for years. Grass-roots environmental movements have stopped natural gas drilling in New York State and Quebec, and they threaten the expansion of oil company operations, pipelines and port terminals in the Western United States and Canada.

Bigger challenges face Mexico, still a fading producer for United States demand. Even as Mexico is pressing ahead with constitutional changes that promise to open exploration and production to international oil companies for the first time since the 1930s, the fine print of the legislation to carry this out is still in doubt, while raging drug violence continues to worry investors.

Perhaps most important, the economics of oil and natural gas extraction on the continent are challenging: Deepwater Gulf of Mexico oil drilling, oil sands extraction, and shale drilling are all expensive and require high petroleum prices that are far from assured. Most of the easy-to-drill oil is gone. But should North America produce too much oil too quickly, and exports surge from Iraq (which is already happening) and Iran (should talks with the West over its nuclear program succeed), global oil prices could soften considerably.

There is also the possibility that the pace of shale drilling in places like Argentina, China, and Russia, which have so far lagged North America, could take off, producing sizable new sources of oil and gas on the world market. As unlikely as it may seem, a price collapse, like the one that happened to domestically produced natural gas after 2008, is something every oil executive fears.

History has a way of throwing surprises at the energy patch. After the Arab oil embargoes raised oil prices in the 1970s, few foresaw the sudden collapse of oil prices just a few years later that drove Mexico and parts of Texas into an economic tailspin. Just a decade ago, companies spent tens of billions of dollars on natural gas import terminals that turned out to be useless when an unexpected boom in shale drilling led to a glut of domestic gas. Now those terminals are being converted for export at a cost of many billions of dollars more.

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