Analyst Actions: ENERGY - Bank of Montreal's Take On IEA's World Energy Outlook 2012

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"Long-term Energy Projections - User Beware"

BMO said: "The International Energy Agency (IEA) released yesterday its World Energy Outlook 2012, that highlights a number of interesting long-term trends in global energy supply and demand patterns through 2035, including sharply rising production of oil and natural gas in North America and substantial increases in energy efficiency. So far, so good, both trends are pluses.

"However, some of its startling and questionable projections have raised anxiety about the sustainability of Canadian energy exports to the United States. For instance, the IEA report includes a projection that shows total U.S. oil production rising to 11.1 mmb/d by 2020, which would be a giant leap. This spurred a spate of headlines on the U.S. surpassing Russia and Saudi Arabia as the largest oil producer in the world in the not-too-distant future. And, combined with projections of declining oil consumption due to efficiency gains, some have pushed the notion of the United States becoming a net oil exporter by 2035. Considering that U.S. consumption of crude oil currently is running in the 18-19 mmb/d range, there would have to be some amazing efficiency gains for the U.S. to become crude independent - possible, but not likely.

"Undoubtedly, the use of innovative drilling techniques has unlocked oil from shale formations in the Bakken formation (spanning North Dakota, Montana, and Saskatchewan) and Eagle Ford (Texas) and has reversed a close to four-decade decline in total U.S. crude output: from 9.6 mmb/d in 1970 to 5 mmb/d in 2008. Since then, U.S. oil production rose moderately to 5.6 mmb/d in 2011 and, based on information for the first eight months of 2012, is on track to rise more quickly to an average of close to 6.5 mmb/d this year. But, to get from here to 11 mmb/d by 2020 would be quite a stretch. Productivity is still in long-term decline in existing conventional fields which comprise more than 80% of total output. And, some shale wells also show high rates of decline. There are other reasons that simple geometric growth projections could miss the mark. There are a myriad of complex, interdependent factors that would influence the pace of production growth. For instance, would U.S. refining capacity, which has not risen in decades due to poor economics, expand to match such an increase in crude production? Would there be sufficient inputs to drive such growth in oil production and would resources potentially available to the industry provide higher returns in other areas? Would environmental policies be conducive to such rapid growth in oil production? These issues are complex and their interplay could lead to a wide variance between the IEA's long-term projections and reality.

"What has been the impact of rising U.S. oil production and falling net import requirements on Canadian exports to the United States? So far, it has been positive, which is counterintuitive. Last year, total U.S. imports of crude oil fell 3%, but imports from Canada jumped 12.9%. During the first eight months of 2012, total U.S. imports fell 2.7%, while imports from Canada once again rose a brisk 13.6%. Canada has been garnering a larger share of a slipping U.S. market, at the expense of OPEC and Mexico.

"While the IEA's projections of U.S. oil production and declining net import requirements are likely quite optimistic, those trends are set in motion and will continue for some time. This, plus limits on transportation infrastructure necessary to export oil to the United States, underline the importance of developing pipelines from Alberta's oil sands to either the west or east coasts, possibly both, to facilitate diversification of markets for Canada's producers."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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