Riddle me this: What country is a top 10 global exporter of oi, but imports more than 40% of its oil needs? That would be our poutine-loving neighbors to the north, Canada.
Now, you're probably wondering how Canada can be a top global exporter of oil yet import so much at the same time. It's quite the predicament -- and it's holding North America back from energy independence.
Location, location, location
Over the past few years, the oil and gas industries have boomed in North America. New technologies such as hydraulic fracturing and horizontal drilling have allowed us to tap into sources we once never thought existed, let alone dreamed of accessing. This resurgence in North American energy has transformed Canada into a top 10 oil exporter and America into a net petroleum product exporter. This does seem a bit odd, though, considering both countries still import foreign oil. What gives?
Unless you have an oil derrick or a field of solar panels in your backyard, then the energy to power your home, car, or jet pack was transported there via ship, pipeline, train, or truck. Where you are will determine how energy gets there, and more importantly how much it costs. This cost issue plagues both Canada and the U.S. right now, and the two following graphics explain why.
Major Canada, U.S. Export-Import oil pipelines (Source: Canadian Association of Petroleum Producers)
Major Canada, U.S. export-import gas lines (Source: Office of the Federal Coordinator)
See all of the oil and gas pipelines connecting the eastern and western parts of North America? I don't, either. This is the problem. The cost to transport oil from west to east via truck or train is so high that it is more cost-effective for the eastern states and provinces to import oil than to buy their own domestic supply. Conversely, the western provinces of Canada send their excess supply to Asia.
Nearly 40% of Americans and 65% of Canadians live on the Eastern Seaboard. This means a lot of energy needs to be imported for the East Coast. Just to give perspective, Canadian provinces east of Ontario import 60% of all their oil needs from foreign sources, and America imports 9 million barrels of oil a day. For North America to be energy-independent, we need both adequate sources of energy and a cost-effective method to transport it.
The most economical way to transport both oil and natural gas is via pipeline, and a few midstream oil companies could be in the right position to overhaul our continental pipeline infrastructure.
That one trans-Canadian pipeline you see in the second picture is owned by TransCanada (TRP -0.30%), and it's underused. The company has plans to convert this pipeline from natural gas to oil. That change would have the potential to move shale oil and oil sands from the Horn River and Brakken fields of Alberta to eastern Canada. The TransCanada pipeline could not only relieve the east's oil imports but could also turn eastern Canadian ports into oil exporters.
Unlike previous efforts by Canadian oil producers to get pipeline access to the Atlantic (cough, Keystone XL, cough), this conversion is much less likely to run into political and regulation obstruction because it is a pre-existing pipeline.
What about the United States? If Canada can have a pipeline to the east, then we should be able to transport oil and gas throughout the East Coast as well, right? Several players in the energy industry are betting on it and are getting ready to spend $130 billion to $210 billion to upgrade and expand the U.S. natural gas infrastructure. Companies such as Kinder Morgan (KMI -0.88%) and Energy Transfer Partners (ETP) salivate at the idea of expanding their pipelines and terminals into the most densely populated regions of the United States. In 2013, Kinder Morgan will break ground on four separate projects to upgrade its Tennessee Gas Pipeline in the Marcellus Shale play and the Northeast. ETP is really showing a sign of the times, as it has proposed to reverse the flow of one of its pipelines so it can export crude rather than import natural gas.
These midstream oil companies won't be the only ones to reap big benefits from pipelines. The expansion of the oil and gas infrastructure will mean downstream companies such as Clean Eenrgy Fuels (CLNE -4.51%) will be able to deliver product to consumers more efficiently. Both Clean Energy Fuels and a General Electric (NYSE: GE)/Chesapeake Energy (CHKA.Q) joint project are looking to deliver natural gas to the automotive industry through a rapid expansion of natural gas fueling stations around the country. The expansion of the natural gas pipeline will make these fueling stations much more viable.
What a Fool believes
Some think North American energy independence is either impossible, or inevitable. I'm not completely swayed one way or the other. Right now, though, momentum is on the side of North America's oil and gas production. Industry reports indicate that domestic production in September was at its highest since 1997. If that kind of production continues, by the end of 2012 America will be at its highest level of energy self-sufficiency in more than two decades.
This infrastructure overhaul is the facelift America's energy sector needs -- and is an essential aspect to bring our country closer to energy independence. Is it the silver bullet? No. To be successful in achieving energy independence, we need a multifaceted approach that constitutes increased supply, diversified sources, and more efficient distribution networks. It will take time and effort to weed out inefficiencies like our pipeline problem. But as Winston Churchill said, "You can always count on Americans to do the right thing -- after they've tried everything else."
Increased production, huge infrastructure prospects, and a country looking to provide a new level of energy stability all add up to great prospects for investors. While there is a wide range of potential winners in this space, we at The Motley Fool keep a sharp eye out in this sector, and our analysts have found The Only Energy Stock You'll Ever Need. We've put together a free report for investors so you can get in on this great opportunity. To get a copy of this free report, click here. Did I mention it's free?
