This week, the Seaway pipeline system — which was designed to carry crude oil from the U.S. Gulf Coast to the Midwest — reversed the flow of its oil transport to drain and transport an over-supply of crude in the interior U.S. down to South Texas for refining.
Thanks in large part to major advancements in hydraulic fracturing and horizontal drilling that have elevated prospects for significant shale oil and gas development over the next decade, the Seaway reversal is the first big piece of what will be a massive retooling of U.S. energy infrastructure to link the interior to the coast. This will not only lead to more energy and economic security for the United States, but also provide the U.S. with more flexibility in conducting its foreign policy.
The U.S. has been a major energy importer for decades and so has developed its energy infrastructure to bring crude from the entry and refining points at the ports on the Gulf coast to the interior, where supplies have, until recently, been lowest.
With shale oil and gas development now on the rise, the United States is finding itself in very unfamiliar — and promising — territory. Energy basins all over the U.S. are more productive now than they have been in decades, and many of them are in places that have not produced substantial volumes before. In the continental interior — a region including everything from western Pennsylvania to North Dakota to Colorado to Oklahoma — more crude is now being produced locally than can be consumed locally. This region is also the terminus for growing Canadian crude exports to the U.S.
The result? A massive glut of crude in the interior that has crude priced much lower than crude produced on the coasts. That's about 15 percent cheaper today as measured by the difference between Cushing and Brent crude oil benchmarks. It therefore no longer makes economic sense for crude transport systems like the Seaway project to run from the coast to the interior. Now that it's being reversed to transport crude from the over-supplied hub at Cushing, Oklahoma down to the Gulf coast near Houston, Seaway will be transporting about 150,000 barrels per day (bpd) to the coast this year. Output will then increase to roughly 400,000 bpd by early 2013. And, if everything goes as planned, a twin pipeline will be built to double capacity to 850,000 bpd by mid-2014.
The Seaway reversal is the first step to a massive revamping of the U.S. energy infrastructure as the country prepares for a revolutionary shift in shale oil and gas recovery. The U.S. has significant shale oil and gas resources overlaid with sufficient water supplies to facilitate extraction, a highly developed natural gas collection and distribution center, and large amounts of technology and capital that it's ready to invest in making the U.S. more energy independent. This is going to take some time — and loads of money — but it is also the natural path for U.S. development as the country works toward realizing its energy potential.
The U.S's shifting energy profile does not mean that the United States has the option of disengaging itself from the thornier, energy-producing regions of the world. The United States will still rely heavily on oil from foreign sources for primary functions like fuel for transport. So will many of the U.S.'s allies. The United States accounts for roughly a quarter of the world's economic activity and it remains the effective commander of the seas. That kind of global power simply does not allow for an isolationist foreign policy. What this growing energy advantage does mean for the U.S. is that it will have more room to maneuver in dealing with problematic energy producers and energy-starved strategic allies. Whether you're a producer like Russia or Saudi Arabia or an embattled consumer like Turkey or Poland, that is some serious food for thought for the next decade.