“A Quiet Reversal in Hemispheric Energy Trade”
Jed Bailey
Managing Partner - Energy Narrative
Cambridge, Massachusetts
October 9, 2012
Introduction
The recent surge in domestic oil and natural gas production, combined with stagnant demand growth, has steadily chipped away at the United States’ net energy imports. The trend has prompted speculation that “hemispheric energy independence”—where U.S. energy imports are more than matched by exports from Canadian and South American energy producers—could be a reality by the end of the decade. It is a beguiling idea, although one that disregards the global nature of energy markets. More importantly, the focus on broader energy independence overlooks a dramatic shift in hemispheric energy trade that has already taken place.
Over the past seven years, net petroleum imports from Latin America have been cut in half. In the same period, natural gas and coal flows completely reversed direction, transforming the United States from a net importer to a net exporter to the region. This rapid and continuing shift will have significant long-term implications for hemispheric energy relations. Historically, U.S. foreign energy policy promoted regional energy investment to boost supplies available for export to the United States and supported U.S. companies investing abroad. Now that the United States is not just an energy importer, but also the largest energy exporter to the region, this framework must evolve to balance a more complex set of priorities involving a much greater number of interested stakeholders.
The U.S. Energy Boom in a Hemispheric Context
The shale revolution, unleashed by the innovative combination of horizontal drilling technologies and hydraulic fracturing (fracking) techniques, has driven U.S. annual dry natural gas production from 18.5 trillion cubic feet (Tcf) in 2006 to 23 Tcf in 2011. Applying those same production techniques to shale formations rich in liquid hydrocarbons has helped domestic oil production return to levels last seen a decade ago. Even coal production has been affected: with current natural gas prices below $3 per million Btu (MMBtu)—a fraction of its 2005 peak of just over $15 per MMBtu—natural gas has displaced coal as the primary fuel for power generation for the first time.
U.S. petroleum imports (including crude oil and refined products) peaked in 2005 at just over 14 million barrels per day (mbd), roughly one-third of which came from Latin America (peaking at 4.65 mbd, mainly from Mexico and Venezuela). In that same year, the United States exported 1.1 mbd of oil and petroleum products, half of which (600,000 barrels per day) went to Latin America. This resulted in net U.S. petroleum imports of roughly 13 mbd overall and 4 mbd of net imports from Latin America.
Since then, U.S. petroleum imports have fallen to average just 10.8 mbd in the first half of 2012. Imports from Latin America have fallen even faster, to average just 3 mbd this year, accounting for 28% of the total. At the same time, U.S. petroleum exports have nearly tripled, to over 3 mbd this year, with those to Latin American countries more than doubling to over 1.5 mbd. Falling imports and rising exports have squeezed U.S. net petroleum imports to just 7.8 mbd. The country’s petroleum trade balance with Latin America saw an even greater swing: net imports from the region are now just over 1.5 mbd, less than half the level seen just seven years ago.
The trend is even more dramatic for natural gas and coal, where net flows between the United States and Latin America have actually reversed. U.S. natural gas imports peaked slightly later than oil, reaching an average of 13.7 billion cubic feet per day (Bcfd) in August 2007. At that time, just over a tenth of natural gas imports came from Latin America, mainly in the form of liquefied natural gas (LNG) from Trinidad. At the same time, the United States exported 2.25 Bcfd, of which roughly 800 million cubic feet per day (MMcfd), some 36% of the total, was sent to Latin America, primarily to Mexico via pipelines.
Fast forward to the present day: U.S. natural gas imports now average just 8.6 Bcfd, almost entirely from Canada, and imports from Latin America have crashed to average just 211 MMcfd, about 2% of the total. U.S. natural gas exports have also surged, reaching an average of 4.3 Bcfd. Latin America still receives about one-third of the total, now reaching almost 1.5 Bcfd. The net effect is a dramatic reduction in net U.S. natural gas imports—from 10.4 Bcfd in 2007 to 4.35 Bcfd in 2012—and a complete reversal in its trade balance with Latin America, from importing a net 576 MMcfd in 2007 to exporting more than twice that (1.26 Bcfd) this year. This nearly 2 Bcfd swing in trade flows happened in only five years.
United States’ trade in coal, although tiny relative to the total domestic market, has also undergone a sea change. Until 2006, the United States exported slightly more coal than it imported, and both imports and exports were growing slowly over time. In that year, total U.S. imports were roughly 36 million tons per annum (mtpa), four-fifths of which (29.6 mtpa) came from Latin America (two-thirds of U.S. imports were from Colombia alone). The United States exported just under 50 mtpa of coal, with only 5.6 mtpa destined for Latin America, four-fifths (4.53 mtpa) of that to Brazil. As a result, the United States was a net coal exporter overall (albeit, of only 13.4 mtpa), but a net importer from Latin America (to the tune of 24 mtpa).
Since 2006, however, U.S. coal exports have surged and imports all but disappeared as natural gas steadily displaced coal from power generation. Total U.S. coal exports more than doubled, to 107 mtpa in 2011, while exports to Latin America increased 260% to 14.6 mtpa (60% of which to Brazil). In the same period, U.S. coal imports fell by two-thirds to 13 mtpa overall and 10.3 mtpa from Latin America (more than 90% of which came from Colombia). This dramatic shift allowed net U.S. coal exports to leap seven-fold to 94 mtpa, and the country flipped to become a net coal exporter to Latin America.
Implications for Regional Energy Relations
This shift in energy trade volumes and patterns has profound implications for United States’ energy relations with its Latin American neighbors. Historically, U.S. policies that addressed energy’s role in regional geopolitics focused on supply side measures. Promoting regional investment in both traditional energy sources, as well as alternatives such as biofuels, increased energy supplies available for export to the United States and blunted the influence of the region’s energy exporters, particularly Venezuela’s influence in Central America and the Caribbean.
The new landscape requires a fundamental shift in U.S. perspective: from being a major energy importer needing to secure supplies to being the dominant regional energy exporter focused on securing markets. Indeed, the United States is now the hemisphere’s largest exporter of coal and is second only to Canada in total natural gas and petroleum (crude and refined products) exports—and Canada sends virtually all of its exports to the United States. Notably, the United States exports more petroleum to Latin America (primarily as refined products) than any of the region’s traditional crude oil exporters, including Mexico and Venezuela. As such, policies to open regional markets and support U.S. energy exporters should become a more prominent feature of U.S. hemispheric energy diplomacy.
This new hemispheric energy trade landscape is more complex and involves a greater number of interested stakeholders. Regionally, a far greater number of countries import energy from the United States than export energy to it. Today, twice as many Latin America and Caribbean nations import oil and oil products from the United States than export oil and oil products to it. Since 2006, the number of Latin American countries importing more than 50,000 tons of coal per year from the United States has tripled. Natural gas exports are currently limited to Mexico, but liquefaction projects currently underway in the Gulf coast will soon greatly expand the roster of countries importing U.S. natural gas as LNG.
This larger list of relevant trade partners requires greater commitments of time and resources to manage and deepen relationships. The major energy exporters to the United States also now import growing energy volumes, adding new dimensions to what was once a simpler relationship of supplier and consumer. These changes can complicate foreign-policy coordination, but can also enhance U.S. influence in the region as the United States engages more broadly and relationships become less unidirectional.
On the domestic front, the range of constituents with a stake in U.S. hemispheric energy policies is also shifting and growing. What once primarily concerned companies investing abroad and importing fuels now matters to a growing slate of domestic energy producers and refiners promoting their exports to the region.
The difficulties in balancing the many stakeholders’ conflicting agendas can be illustrated in the case of exporting natural gas to the Caribbean and Central America. The LNG export facilities planned for the U.S. Gulf Coast are perfectly located to supply natural gas to Central American and Caribbean countries that currently rely on imported gasoline, diesel and residual fuel oil for electricity generation and transportation. Cost-effective, small-scale LNG or compressed natural gas (CNG) infrastructure and shipping capacity is needed to achieve this transformation, but there is a clear potential to greatly reduce the energy costs and import bills that these countries face.
Promoting investment in this infrastructure would clearly benefit the countries involved, would boost U.S. influence in the region (as U.S. natural gas displaces Venezuelan refined products), and would help reduce greenhouse gas emissions. It could, however, come at a great cost to Trinidad, as the United States evolves from being its largest LNG customer to its greatest competitor. Domestic natural gas producers and infrastructure developers would clearly support such an investment policy, but Gulf Coast refiners, coal producers and transporters, and U.S. power companies that have invested in coal- and oil-fired power generation in the region would not.
These complexities are common in policy making, but until recently have been less pronounced in U.S.-Latin American energy relations. Policy makers across the hemisphere must recognize the shifting energy trade dynamic and its implications for hemispheric relations in order to ensure that trade agreements and policies remain relevant in this new landscape.
Jed Bailey is managing partner at Energy Narrative. Previously, he was vice president of Applied Research Consulting at IHS CERA research in Cambridge, Massachusetts, where he also served as managing director for emerging markets for research and operations in Asia and Latin America.
