The rapid emergence of North America’s unconventional shale plays and oil sands has reordered the world’s energy business. But just how big are the future opportunities for U.S. and Canadian operators?

A new report, “North American Unconventional Oil, An Integrated Assessment to 2017,” focuses on what lies ahead for each link in the oil value chain—upstream, midstream and downstream— in the coming years. Hart Energy Research & Consulting (HERC) published the nearly 400-page study in December 2013, which is now available.

It updates and replaces the research team’s “Refining Unconventional Oil” (RUO) report released just one-and-a-half years ago. But the trends first analyzed there have only magnified in intensity. The impact of the myriad changes wrought by the unconventional plays is complex—but very positive, the report determines.

“The energy landscape in North America, from upstream to midstream to refining, is changing rapidly as more and more unconventional petroleum liquids and natural gas from shale and tight oil formations are brought on stream,” the report begins.

“Production of unconventional liquids in the U.S. increased from essentially zero in 2005 to 3.2 million barrels (bbl.) per day in 2012. Canadian tight oil went from zero in 2005 to 76,000 bbl. per day in 2012, and production from another vast unconventional resource, the Canadian oil sands, increased from 1.2 million bbl. per day in 2005 to 1.8 million bbl. per day in 2012.

“HERC expects this growth to continue well into the next decade, with profound impacts on competitiveness and energy security in the U.S. and Canada,” it adds.

Total U.S. liquids production could rise from a little more than 8 million bbl. per day in 2010 to more than 12.5 million bbl. per day in 2017—an increase of more than 50% in just seven years. Canada, likewise, could see a production increase of more than 40% during the same period.

Midstream’s role

The study finds extensive opportunities—and challenges— for the continent’s midstream players, which must gather, process and move all the new crude oil and natural gas liquids (NGLs) to customers.

“The midstream industry has quickly added or restructured existing assets and built capacity in response to the logistical bottlenecks and the resulting price differentials,” says the report. “These innovators and their investors are now following their upstream colleagues and evolving and optimizing a path to more economical, higher-capacity pipelines, unit-train facilities and marine logistics.”

The U.S. enjoyed well-developed midstream infrastructure before the current trends started. However, the system in place “was developed for an environment that included declining crude oil production in the U.S. and not for the current environment of increasing oil production. Consequently, bottlenecks have arisen, creating the opportunity for midstream investments,” the report says.

The response will include new pipelines and the repurposing of existing systems—plus the rapid expansion of crude shipped via rail, a transportation mode lightly used since the end of World War II, but now expected to serve a long-term need again.

“The movement of crude oil by rail is a new development that is taking place because of the dislocations resulting from the changing crude oil flow dynamics, which the current pipeline system cannot fully accommodate. Logistics expansion in the midstream segment is still under construction,” it adds.

Price differentials

The midstream build-out will help right, over time, the wide crude price differentials that have emerged.

“In the next five years, HERC believes an amply expanding portfolio of midstream logistics will be called upon to balance the North American market with eversmaller differentials amid expectations of high U.S. crude oil production growth (+1,939 thousand bbl. per day) and little U.S. crude oil demand growth (up 553,000 bbl. per day total),” it says.

“Our current analysis leads us to expect that the still ramping massive infrastructure build-out, which RUO labeled as a ‘super-cycle,’ will amply address takeaway needs from producing regions given our production and refining crude demand forecasts.

“The response has been so rapid and comprehensive in the six or so quarters since HERC initiated its RUO research that we have begun to hear concerns that portions of the continent may be ‘over-piped’” if all announced projects are completed, it adds.

Keystone XL

One of the biggest proposed midstream projects may not happen, the study suggests. TransCanada PipeLines’ long-suffering Keystone XL Pipeline extension proposal has become bogged down in political debate and lawsuits by activist opponents. Technical merits or economic justification for the project have become secondary to those arguments.

Meanwhile, the ever-inventive midstream has started work on alternatives if the project doesn’t happen. Oil sands production won’t subside, according to the study, which then considers the merits of these options.

The report focuses on liquids production but also considers related natural gas in general and, in particular, the game-changing impact of large-scale liquefied natural gas (LNG) exports from North America.

“HERC views the policy discussion on LNG exports as not whether the U.S. will export, but rather when and how much. The U.S. and Canada effectively constitute a single integrated natural gas market because of gas pipelines that cross the border at dozens of points in the Northwest, Midwest and Northeast,” it says. “Global demand for LNG is rising, and market forces will shape the development of export/ import terminals.”

While U.S. energy independence may be a worthy goal, the report suggests it may not be a wise national policy.

“We do not believe it is possible or even preferable to back out all imports, given factors such as equity ownership in U.S. refiners by foreign producers, as well as long-term crude supply contracts,” it says, but adds “blending out offshore U.S. intermediate crude imports and backing out North American offshore light crude imports could absorb significant volumes of light crude—the amount of net new U.S. light crude supply we expect to be produced and remain after simulated refining gains in the next five years,” it says.

Looking ahead

The report seeks to give energy executives and investors insights on what lies ahead so they can plan accordingly.

“North America is experiencing rapid growth in oil production driven by unconventional resource development,” the study says. “HERC sees this growth continuing into the foreseeable future, well beyond the time frame of this analysis.”

That’s a substantial change from what was once the industry’s conventional wisdom.

The primary goal of the study “is to highlight the potential opportunities across North America’s integrated oil industry and to turn information and analysis into insights for decision-making,” it adds.