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September 02, 2014
Brattle Consultants Prepare Two Reports for the American Petroleum Institute on Natural Gas and Crude Oil Markets

Brattle consultants have authored two separate reports for the American Petroleum Institute (API) that provide a comprehensive overview of the natural gas and crude oil and product markets.

“Understanding Natural Gas Markets,” authored by principals Steve Levine, Paul Carpenter, and associate Anul Thapa, discusses the implications of increased U.S. natural gas production. Technological advancements in natural gas extraction methods have made unconventional shale gas resources more accessible and economic. As of 2013, shale gas production accounted for approximately 40% of U.S. Lower 48 natural gas production, compared to approximately 5% in 2006. The growth in natural gas supply has outpaced demand growth, resulting in lower prices and lower volatility.

The report points out several key trends affecting the industry, including:

  • U.S. natural gas demand is increasingly served by domestic production from unconventional shale gas sources rather than imported natural gas from Canada and other conventional supplies;
  • Natural gas use for electricity generation is expected to increase due to low prices and expectations of continued coal plant retirements;
  • Industrial sector gas demand is also expected to increase as a result of low natural gas prices;
  • The growth in shale gas production has resulted in shifting flows on the U.S. interstate pipeline network; and
  • The substantial production increases and low prices in the U.S. are leading to the development of both LNG and pipeline export projects, which could result in the U.S. becoming a net exporter of natural gas.

The authors discuss these trends in detail and describe some of the key changes that will affect U.S. natural gas markets and prices in the coming years.

“Understanding Crude Oil and Product Markets,” prepared by Mr. Levine, principals Gary Taylor, Dan Arthur, and associate Mike Tolleth, discusses the recent rapid growth of crude oil production in North America and its implications for U.S. and global markets for oil and petroleum products. In the U.S., advances in horizontal drilling and multi-stage hydraulic fracturing are being utilized to access oil resources from shale rock formations that were previously either technically impossible or uneconomic to produce. Production from the oil sands in Western Canada has also risen significantly. In aggregate, North American production has increased more than 45% over the past five years, from 7.5 million barrels per day in 2008 to 11.0 million barrels per day in 2013. This increase in production has reduced U.S. dependence on crude oil imports from overseas.

The report examines how this growth has been met with several challenges that may limit North America’s ability to take full advantage of its new crude oil resources, including:

  • Refining constraints due to a mismatch between new domestic crude supplies (primarily light crude oil) and existing refinery capacity (much of which is designed to process heavy crude oil);
  • Pipeline transportation constraints limiting the ability to move increasing crude oil supplies to refining centers; and
  • Slow development of North American pipeline infrastructure to relieve these constraints.

These challenges have given rise to significant price differences among crude oil supplies produced in different parts of the U.S. and more generally have resulted in U.S. crude oil prices declining relative to world prices. The authors conclude that changes in the North American petroleum markets over the next several years will largely depend on world oil market conditions, continued changes in crude oil production, the response to additional infrastructure needs, and whether North American oil supplies are made available for export to overseas markets.

The reports can be downloaded using the link below. Additional information can also be found on API’s website.