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U.S. oil output surge dominating global crude growth, IEA says

Machinery used to fracture shale formations stands at a Royal Dutch Shell Plc hydraulic fracking site near Mentone, Texas, U.S., on March 2, 2017.

Matthew Busch/Bloomberg

Booming American shale oil supply will dominate global crude growth over the next few years, but there will be room for increased Canadian exports into the U.S. as producers there target export markets, the International Energy Agency said Monday.

In its annual outlook for world oil markets, the Paris-based agency forecast that the U.S., Canada and Norway will account for virtually all global supply growth over the next five years, and warns of a long-term supply crunch unless investment increases to satisfy growing demand.

"Upstream investment may be inadequate to avoid a significant squeeze of the global spare capacity cushion by 2023," it said in a report released Monday.

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While Calgary-based producers worry about a lack on investment in Western Canada, they are not alone. The IEA said that after three years of declining or flat investment, there will be little growth in global capital expenditures this year. The modest increase will be concentrated in the U.S. shale fields, where technological advances have driven down the cost of production.

Around the world there has been a paucity of spending on exploration and development. Discoveries of new oil resources fell to a record low in 2017, with less than four billion barrels of crude, condensate and natural gas liquids (NGLs) confirmed, the IEA said.

Industry sentiment is indeed improving along with rising prices, but major oil companies are reluctant to invest vastly higher sums. Instead, they are retaining their focus on costs, efficiency improvement and return on capital.

However, American production from known shale-oil reserves is soaring. Over the next five years, the U.S. is expected to add 3.7 million barrels a day of liquids productions, which includes crude, condensates and NGLs. That would take U.S. liquids output to a total of 17 million barrels a day. Still, Canadian producers should be able to increase shipments to U.S. refineries, assuming completion of new pipeline projects like TransCanada Corp.'s Keystone XL and Enbridge Inc.'s Line 3. That's because American refineries are geared to process medium and heavy grades and crude while the shale fields produce light oil.

"As Canadian shipments to the U.S. grow, this frees up lighter U.S. crude for export, particularly to meet Asian demand for petrochemical feedstock," the IEA said.

The consultancy Wood Mackenzie said American crude producers are targeting the export market, particularly in Europe where they are competing with East African production. It expects U.S. crude product to exceed 11 million barrels a day by 2023, a figure that does not include NGLs and condensates.

"With limited additional demand for these volumes in the domestic refining system, future U.S. production will need to clear into export markets," Wood Mackenzie's chief economist Ed Rawle said in a release Monday.

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In 2016, just 32 per cent of crude processed by American refiners were light grades. "Without large-scale capital investment, the U.S. domestic market can only absorb about a quarter of the additional four million b/d of U.S. crude expected to enter markets [by] 2023, leaving the rest for exports," Wood Mackenzie said.

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