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Shale revolution will be a long time coming

GCC exports of crude will be driven by sustained demand from Asia

Gulf News

There is much hype about shale oil and gas these days, and a lot of what is being said is true. Its impact on the price of oil and manufacturing costs in the US will soon be considerable. China will probably become less competitive.

But on the global scene, we see no major changes in the total demand for Gulf oil in the next two decades. Consumption is projected to continue to grow, driven by fossil-fuel hungry Asian economies. And the Gulf is successfully shifting their attention to cater to that demand.

In spite of the recent technological developments in the extraction of natural gas, its lower price and its lower environmental impact, growth in oil consumption is projected to outpace growth in natural gas consumption in the next 20 years. Oil’s central role in the world’s energy mix will remain substantially intact, mostly due to strong growth in Asian demand.

The increasingly larger supply of natural gas will probably create pressure to reduce oil prices, but will not take away a significant share from oil’s global market.

China has the largest reserves of shale gas in the world (19 per cent of the total, ahead of the US with 13 per cent) and a regulatory framework that supports the development of shale gas technology. However, technical issues such as lack of water, depth of gas deposits, their proximity to urban areas and lack of technological skills make exploitation extremely expensive and will prevent a development of the industry similar to that of the US in the near future.

China versus the US

Even with all the efforts in place, China will barely match 40 per cent of US shale production by 2020, and that’s according to Chinese energy authorities. China will have to rely massively on coal and oil to cover around 80 per cent of its energy needs until 2035. While its domestic production of coal is very large, in terms of oil, China will have to depend on imports from the GCC as well.

Asia is already the GCC’s biggest trading partner and will remain the main source of growth in oil demand in the medium term. G3 economies (the US, Europe and Japan) have traditionally been the main destination of the region’s exports. In 1990, the G3 were buying 45 per cent of all GCC exports, while Asia made up only about 15 per cent.

In just 23 years, the situation has reversed: the G3 countries now buy 23 per cent of the region’s exports, while Asia gets 43 per cent. And even if the US becomes energy-independent by 2030, a sizeable part of the decrease in American demand will be offset by Asia. According to Opec, China is projected to outpace the US as the world’s top crude importer by 2014, but the truth is that it will probably happen later this year.

China’s rising refining capacity is propping up demand. The rest of Asia will also play an important role in keeping oil demand high. India is expected to overtake Japan in less than five years. Thailand, Malaysia, Indonesia and the Philippines are experiencing strong consumption growth.

The GCC is, therefore, likely to retain its pivotal role as the leading energy‐exporting region in the world. The high cost of switching from oil to natural gas, the establishment of a more stringent regulatory framework for the process of fracking due to growing environmental concerns and rising Asian demand will prevent the world’s energy landscape to change rapidly.

GCC exports of crude will be driven by sustained demand from Asia, although their margins will probably be reduced as a result of diminishing external energy needs.

— The writers are economists at Asiya Investments.