Is a New Energy Cold War Brewing?

by Aaron Levitt | October 15, 2013 7:00 am

It’s simply amazing how much hydraulic fracturing and horizontal drilling has changed the energy landscape in the U.S. These advanced drilling techniques have given new life to old legacy fields and have allowed us to tap our vast shale rock formations in places like Texas, Pennsylvania and North Dakota[1]. All of this has unearthed huge deposits of natural gas and oil not seen since the oil boom in the 1980’s.

The dream of energy independence is well at hand.

What’s crazier still, is that America is quickly climbing the ladder of the world’s energy producers[2] and could very well take the top spot in just a few years’ time. That’s certainly awesome news for American energy companies and their investors … though it probably won’t sit too well if you’re a former energy leader.

Especially if American firms are also tapping energy deposits in your own backyard.

This love/hate relationship could be the start of something big.

The Good News

All of that fracking is having a huge, positive effect on America’s energy production. So much so that our nation is on track to take out some of the biggest producers of energy on the planet[3] — namely, Saudi Arabia and Russia.

According to data provided by the Energy Information Administration, America’s total production of oil and natural gas will pull ahead of both countries this year. E&P firms will pull just under 25 million barrels of oil, natural gas and related natural gas liquids (NGLs) daily from our borders this year. Russia will produce less than 22 million barrels a day, while Saudi Arabia will only manage about 13 million barrels of oil equivalent.

That’s a big win for the United States’ energy industry.

Much of that new production has come from the western half of our country. Since 2010, oil production in Texas — courtesy of the Eagle Ford — has more than doubled, while North Dakota’s Bakken shale has seen a tripling of production growth. EIA data also shows that states like Oklahoma[4], New Mexico, Wyoming, Colorado and Utah have seen exponential increases in oil production during the past three years.

Not to be outdone, Pennsylvania’s Marcellus shale continues to churn out high volumes of natural gas and related liquids. And who could forget about the production increase coming from the deep waters in the Gulf of Mexico[5].

Perhaps the biggest win of all this is that during the past five years, U.S. imports of natural gas and crude oil have fallen by 32% and 15%, respectively … all while reducing our trade deficit.

The Bad News

You’re probably shouting “USA!” right about now … unless you’re a Russian energy company like Gazprom (OGZPY[6]).

With rising domestic production and falling U.S. imports, those nations that rely on exporting their production must now contend with a glut of global supply. That’s an issue considering Russia receives more than 40% of its budget[7] from oil- and gas-related duties and taxes.

To combat the falling demand from the west, Russian producers are having to spend billions of dollars to build new pipelines toward China[8] and other Asian nations. But Beijing isn’t mucking around. Despite needing a plethora of all things commodity, China has been very assertive when it comes to price and is willing to stockpile and shift demand around to suit its own needs.

At the same time, Russia is being forced to partner with American firms like Exxon Mobil (XOM[9]) to gain access to fracking and deepwater drilling technology. These agreements have all come with profit-sharing/oil royalties and were written when Russia still was on top.

None of this makes Russian leader Vladimir Putin a happy camper — which is why things could get ugly. Russia will always do right by Russia, and Putin is willing to throw a temper tantrum when he doesn’t get his way.

For example, energy firm Yukos was forced into bankruptcy and CEO Mikhail Khodorkovsky sentenced to jail[10] because he pissed off Putin’s buddies at other state-owned energy firms. Other examples include raiding BP’s (BP[11]) offices in the country, forcing retailers Carrefour and Walmart (WMT[12]) to withdraw from the nation[13], and the complete takeover of Royal Dutch Shell’s (RDS.A[14], RDS.B[15]) $22 billion Sakhalin-2 oil and gas.

These examples and many more underscore the fact that Russia isn’t willing to play fair when it doesn’t get its way.

Bottom Line

While Exxon and other producers have surmised that “this time is different,”[16] I’m not so sure. A few years of losing to the U.S. and the billions of dollars that XOM and others have put into developing Russian fields could be gone in a fit of Putin-istic rage.

After all, Russia’s “elected” will be in charge for a long long time.

I understand that the larger integrated oil majors need to expand to keep growing, but I would caution them — and any investor — from digging too deep into Russia’s energy riches.

The Energy Cold War could be just beginning.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

  1. North Dakota:
  2. world’s energy producers:
  3. take out some of the biggest producers of energy on the planet:
  4. Oklahoma:
  5. Gulf of Mexico:
  6. OGZPY:
  7. receives more than 40% of its budget:
  8. new pipelines toward China:
  9. XOM:
  10. CEO Mikhail Khodorkovsky sentenced to jail:
  11. BP:
  12. WMT:
  13. withdraw from the nation:
  14. RDS.A:
  15. RDS.B:
  16. “this time is different,”:

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