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Too much of bluster building up over shale oil

Much of it is hype and unrealistic hope of the US being less import-dependent

Gulf News

As discussions on shale (tight) oil’s prospects get more sober and reasonable, we still see some hype in the media driven by anti-Opec, anti-Middle East, anti-Arab and anti-Saudi Arabia sentiments.

The hundreds of billions of barrels provided by these sources over the last 50 years for the benefit of the world economy, especially the Western economy, are at least temporarily forgotten in the euphoria of desperately trying to subdue Opec producers.

We all remember statements like “We’d never have to worry about Saudi Arabia again”, “Opec would be a thing of the past”, “The coming of Saudi America” or “Liberal America is still reliant on buying oil from stark ideological and geopolitical adversaries such as Saudi Arabia and Venezuela”. There is also that most incredible notion of oil tankers lining US shores to carry exported oil to the rest of the world.

All this because of rising US production of shale oil, a resource that is definitely to be taken seriously — but without the hype and without the enmity towards crude producers — in the foreseeable future.

The media may be excused because its reporters often thrive on the headlines that they can generate. But why should the International Energy Agency (IEA) jump on the bandwagon?

This is really surprising given its leading role in oil market research. Last November, it forecast that the US would become the biggest oil producer in the world by 2017 due to the rise in shale oil production.

This may be possible if all liquid production, including natural gas liquids and biofuels, are included. The situation for crude is different. US crude oil production in 2012 is about 6.2 million barrels a day (mbd) while that of Saudi Arabia is 10-mbd.

Media distortion

In 2019-20, the US Energy Information Administration (EIA) forecast US crude oil production at 7.5-mbd though shale oil’s may increase by about 2-mbd. Even in a very high growth situation, US crude oil production will not reach 10-mbd before 2025. The media either does not understand this or it does not suit the interests they represent.

In a recent statement, the IEA’s executive director Maria van der Hoeven said in London at the launch of the ‘Medium Term Oil Market Report 2013’ that “North America has set off a supply shock that is sending ripples throughout the world,” and that the shale oil boom “will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15.”

I do not understand why an increase of 3.9-mbd from North America over six years is so transformative when production from conventional oil fields is falling and that US tight oil is only 2.3-mbd of that growth according to the IEA.

On these, there are no clear statements. I saw at least one newspaper saying that “the United States could move from being the world’s leading importer of oil to a net exporter within the next few years.”

Far from it, according to EIA which states that US oil import dependency in 2012 was 40 per cent (about 8.5-mbd) and is likely to fall to 32 per cent by 2014 but will start rising again to 37 per cent by 2040.

Hurdles on the way

Modern shale oil extraction is still relatively new and there may be many surprises on the way. One such is the disappointing results in Ohio as reported recently by Reuters where in spite of investments by many companies, “released annual data on 2012 production showed the state pumped less than 700,000 barrels of oil from its shale wells” and that the result was “lower than initially estimated” and the volume would fill a small tanker.

The average oil production per well per day is reported to be “80 barrels per day — about one-tenth what it is in North Dakota.”

These, according to Reuters, “offer a reality check for the wave of euphoria that has washed across the industry” and that is “a sign that the flush of enthusiasm and rush of investment that piled into shale fields from one coast to the other has hit a curve.”

Worldwide, in the long run, shale oil production is expected to grow from 0.7-mbd in 2010 to 5-mbd in 2030, according to the EIA and from 2-mbd to 8.5-mbd in the same period according to BP. The resulting growth may be in between.

Therefore, crude oil producing countries may have to be very prudent in the short- to medium-term in order not to allow the rise of shale oil production impact oil prices negatively as every analyst is expecting. In the long run, the recovery of the world economy and crude oil demand will take care of the rest.