The 3 Top Energy Stories of 2014

What investors should be watching in 2014.

Jan 6, 2014 at 10:37AM

From America's energy renaissance to furious political battles, the new year is shaping up to be another exciting chapter for the energy industry.

However, a few key issues are likely to dominate the headlines out of the oil patch. So here are the top three stories to watch from the energy sector in 2014. 

1) America's energy revolution marches on
Soaring U.S. oil production has been one of the top stories for a couple of years now. Thanks to new technologies, billions of barrels of previously unrecoverable oil and gas are now being extracted from shale fields like the North Dakota Bakken and the Texas Eagle Ford. 

America's oil boom will roll on in the new year. But a few new plays will be added to investors' vocabulary in 2014. 

The West Texas Spraberry Wolfcamp is one example. According to early estimates from Pioneer Natural Resources (NYSE:PXD), the field could contain some 50 billion barrels of recoverable oil. If accurate, this would make the Spraberry the largest field ever discovered, second only in size to Saudi Arabia's infamous Ghawar. 

Drilling results out of the Spraberry have been impressive. In a recent conference call, Pioneer CEO Scott Sheffield highlighted one horizontal well that has produced 140,000 barrels of oil equivalent within six months. To put that figure into perspective, it takes 30 to 35 years to produce 140,000 barrels from a typical vertical well. New drilling techniques and favorable geology have pulled forward over three decades of energy production. 

Also expect to hear more from Colorado's Niobrara. While the Centennial State is better known for cold beer than drilling rigs, the region could become the country's next big energy name in 2014. 

Energy giant Anadarko Petroleum (NYSE:APC) is betting big on the play.  Last year the company spent $1.5 billion developing its acreage and completed over 150 wells. Anadarko owns about 350,000 acres in the region with an estimated 1.5 billion barrels in recoverable reserves.

Drilling results out of the Niobrara have been strong. Whiting Petroleum (NYSE:WLL) CEO James Volker reported that the company is generating a 400% internal rate of return on every well drilled in the region. And Mr. Volker has highlighted the play as Whiting's most important expansion opportunity outside of the Bakken. 

2) "The Achilles' heel of North American energy independence"
With all of this oil coming out of the ground, the question becomes how to move it.

As economist and best-selling author Jeff Rubin explained to The Motley Fool Canada in October, "The Achilles' heel of North American energy independence -- whether we're trying to double oil sands production in Alberta or double shale production in the Bakken -- is that we don't have the infrastructure to move that production."

TransCanada's (NYSE:TRP) infamous Keystone XL pipeline remains in political limbo. If approved, the project will ship 830,000 bpd of Alberta bitumen and Bakken light oil to refineries on the U.S. Gulf coast. However, Keystone and other proposals have become a battleground between environmentalists and the energy industry. 

In lieu of pipelines, producers are resorting to rail to transport crude oil. However, a derailment in Lac Megantic, Canada last summer and another explosion in North Dakota last week has brought the industry's safety record to the public's attention. 

Without new pipelines or rail transit, most of America's new shale reserves will be left in the ground. 

3) America: oil exporter?
Here's the key issue in 2014: The U.S. cannot export crude oil, but it can export refined product.

This means all the new light oil coming out of shale beds across the country is hostage to North America's limited refining capacity. As domestic light oil replaces the last drop of foreign imports, which could happen some time in the next year, energy prices could collapse. 

Indeed, we're already seeing the beginning of this. So much oil is flowing into the Gulf coast that the price gap between Brent crude, the global benchmark, and Light Louisiana Sweet is at an all-time high. In the first half of last year, Louisiana crude traded at a $1.50 premium to Brent. But since then, it has traded at more than a $7 discount.

Refineries are set to make a windfall from this development by buying cheap U.S. feedstock and exporting refined products at higher international prices. In fact, the market is already starting to price this into equity issues. Refineries like Valero and Phillips 66 bottomed in October at exactly the same time light oil producers like Continental Resources and EOG Resources peaked. 

The next political battle could be to lift the U.S. oil export ban to allow producers to access international prices. This issue was an ominous rumble last year, but expect it to heat up in 2014. And while such a solution would have minimal impact on gas prices, lifting the export ban would be politically challenging. 

Foolish bottom line
The U.S. energy revolution will roll on for another year. But cracks in the optimists' thesis are starting to emerge. There isn't enough infrastructure in this country to handle soaring production, and that's going to become readily apparent in 2014. 

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Robert Baillieul has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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