World’s quest for cheaper oil may end post-2020

More supply than demand to drive oil prices lower in next decade

Gulf News

Abu Dhabi: The world’s quest for cheaper crude may well end sometime in the next decade with the fast-improving horizontal drilling and hydraulic fracturing technology, popularly known as fracking, leading to global oil markets being flooded with the relatively inexpensive shale oil, say energy experts.

The market glut, they say, would then exert downward pressure on the international oil prices as there would be more crude supply than demand.

As matters stand, only the US and Canada are producing oil and natural gas from shale in commercial quantities. The shale oil and gas has transformed the energy outlook in the US

Last month, China surpassed the United States as the world’s largest importer of crude, according to the US government, as the rise of domestic output cuts the US dependence on overseas oil. This development marks a paradigm shift as it shows the world’s largest economy is slowly but surely moving towards its goal of self reliance in oil.

However, the impact of shale energy on the rest of the world has been negligible so far. The experts say continuous improvements in drilling and increases in the number of drill rigs capable of fracking should allow oil and gas production to continue growing in the US, and eventually allow other countries to start producing shale oil.

“Increases in production, both from conventional sources, such as Iraq and Libya and unconventional sources, such as shale oil in the US and ultra deepwater off the coast of South America could mean that the world is awash with oil in five years time. In addition, increases in efficiency, especially in automobiles, should mean that demand for oil from developed countries stagnates, whilst demand from emerging economies could be much less than anticipated. The upshot is that we expect oil prices to decline significantly over the next five years. Indeed, we expect oil prices to be at $70 per barrel by the end of the decade,” Thomas Pugh, Commodities Economist at The London-based research firm Capital Economics Ltd told Gulf News.

Ann-Louise Hittle, the US-based Head of Macro Oils Research for Wood Mackenzie told Gulf News they have studied the potential resources of shale oil globally and “it could lead to even further gains in non-Opec supply after 2020 than we are currently forecasting.”

“However, the development of this resource outside North America is still at the very early stage and it is difficult to assess the ultimate potential. This means the paradigm shift is much more likely to be well after 2020, if it were to occur,” Hittle added.

Hittle said there remain cost pressures as the world continues to bring on oil production in challenging environments such as the ultra deepwater.

“Steep costs, environmental rules and policy are constraints on the use of technology to boost oil production. An example would be the further use of fracturing to enable shale oil output outside North America. However, world oil supply continues growing and remains adequate despite the off and on risks to production,” Hittle added.

Capital Economics’ Pugh said the primary constraints facing the oil market today are sanctions, war and mismanagement. “There are millions of barrels per day of production which is being withheld from the market, this is a key reason why oil prices have stubbornly stayed above $100 per barrel,” said Pugh, adding that most of these constraints are temporary in nature and once resolved, should allow substantial amounts of oil to come back to the market.

He said the marginal costs of production of oil and gas from shale wells are much higher than that of conventional wells. But this is unlikely to prevent the prices of oil and gas from falling for two main reasons. “First, the marginal costs at even the most expensive shale oil wells are well below current prices. And it was only when natural gas hit lows of around $2 per MMBtu that we saw production being cut back in the US Second, marginal costs are not fixed. We have already seen marginal costs at new shale wells fall dramatically and expect them to decline further as the supply of drill rigs and crews increases and technology improves,” Pugh added.

According to the US Department of Energy’s recently revised estimates, global shale resources are vast enough to cover more than a decade of oil consumption.

As per the estimates, there are technically recoverable shale oil resources of 345 billion barrels in 42 countries that were surveyed, or 10 per cent of global oil supplies. The assessment showed that Russia has the largest shale oil resource, with 75 billion barrels, followed by the US at 58 billion, China at 32 billion, Argentina at 27 billion and Libya at 26 billion barrels.

Inside the US, shale now constitutes 30 per cent of oil and 40 per cent of natural gas production, the department said.


Challenges in developing shale resources


However, the experts say, there are a number of factors which may prevent, or at least hinder, the shale revolution from spreading.

According to a research by Capital Economics, first, the geology of most shale sites is worse than that of the US This makes it more expensive and less productive to drill wells elsewhere. Second, environmental concerns have caused some countries, such as France, to ban fracking outright.”

“Third, many areas with shale deposits are also densely populated. Fracking is noisy, dirty and continues round the clock.”

Capital Economics said in China, no Chinese firms have yet the experience of fracking. Some are trying to partner with US firms in order to gain access to technology and have reportedly invested $5.5 billion in US shale gas so far. “The lack of Chinese firms with fracking experience may delay production in the short term, but in the long term Chinese firms will be able to gain know-how and apply it to boosting production at home,” it added.

Pugh previously said increases in production from shale oil in North America would reduce demand from the Middle East, which could leave some countries with a significant budget shortfall.

“However, the high price of oil required to achieve American independence would mitigate any revenue falls and the Gulf producers will remain the lowest cost producers so will still make substantially more profit per barrel than producers of shale oil. What’s more, many Middle Eastern countries are running large budget surpluses or have huge sovereign wealth funds to fall back on, meaning the effect is likely to be smaller than it may first appear.”

According to the Energy Information Administration, imported liquid fuels as a share of total US liquid fuel use reached 60 per cent in 2005 before dipping below 50 per cent in 2010 and falling further to 45 per cent in 2011. The import share is expected to continue to decline to 34 per cent in 2019 and then rise to about 37 percent in 2040, due to a decline in domestic production of tight oil that begins in about 2021.

The Paris-based International Energy Agency (IEA), which advises 28 industrialised countries on energy policy in its oil market report for October said: “Recent demand strength has raised the 2013 oil demand forecast by 90,000 barrels per day, to 91.0 million barrels per day. Demand growth is projected at 1.0 million barrels per day (or 1.1 per cent) for 2013, ramping up to 1.1 million barrels per day in 2014 as the macroeconomic backdrop improves.”

On Friday, the US crude oil futures ended 74 cents higher at $97.85 a barrel, but finished the week with a 3 per cent loss and its third weekly decline. Brent crude for December ended 6 cents a barrel lower at $106.93, its third day of losses and second weekly decline. Brent ended the week 2.7 percent lower, its biggest weekly decline in one month.

The US crude oil prices have been pressured by a seasonal dip in demand and increasing domestic oil production that has boosted stockpiles, particularly on the US Gulf Coast.