Game Over For OPEC?
The rapid growth of shale oil has caused alarm bells among OPEC countries which fear that a supply glut could lead to a price collapse.
Major Middle East oil exporters could see a significant worsening of their trade balances of around 4%-10% of GDP in the long run if they fail to take measures against the rising shale oil production across the world, warns PricewaterHouseCoopers in a new report.
Shale oil and gas, extracted through a combination of horizontal drilling and hydraulic fracturing techniques (also known as fracking), has turned the United States into an energy powerhouse and accelerated crude output in the country from shale plays in the Bakken region in North Dakota, Eagle Ford in Texas and Marcellus in eastern United States.
The country raised output by 800,000 barrels per day last year alone to increase total output to 7.25 million, second only to Saudi Arabia and Russia.
The U.S. Department of Energy estimates that U.S. crude output is expected to reach 8.15 million barrels per day by 2014 – its highest level since 1988. Some estimates suggest the U.S. would eclipse Russian and Saudi production by the end of the decade.
The rapid growth has caused alarm bells among OPEC countries which fear that a supply glut could lead to a price collapse.
Global shale oil production could reach 14 million barrels of oil per day by 2035 – or 12% of the global supply, according to the consultancy.
“We estimate that this increase could reduce oil prices in 2035 by around 25%-40% ($83-$100/ barrel in real terms) relative to the current baseline EIA [US Department of Energy's statistical arm] projection of $133/barrel in 2035, which assumes low levels of shale oil production.”
The lower cost of energy would fuel global economic, raising global GDP by as much as 3.7% – or USD2.7-trillion in today’s global GDP values.
“The potential emergence of shale oil presents major strategic opportunities and challenges for the oil and gas industry and for governments worldwide,” PwC noted in the report. “It could also influence the dynamics of geopolitics as it increases energy independence for many countries and reduces the influence of OPEC.”
Russia, Argentina, China and Australia, which are home to massive shale oil and gas reserves, could also help transform the energy industry, making OPEC a sideshow in the global energy place.
NO GLOBAL SHALE GALE?
But it is important to remember that fracking for shale oil and gas has not been a huge success in other parts of the world.
There are a number of reasons why shale extraction may not have the same success globally as it did in North America.
North America arguably has the most developed energy infrastructure anywhere in the world. Massive pipelines, rail and waterways infrastructure, makes access to markets easier from, say, Eagle Ford in Texas to the accomplished refineries on the Gulf Coast.
Availability of skilled labour, market and business frameworks and access to oil services and machinery, makes shale development much easier.
That will not be the case in the remote regions of Russia, China and Argentina.
2 GEOLOGICAL DIFFERENCES
Each shale basin is different, and needs a markedly different approach. ExxonMobil discovered that problem in Poland – the most promising shale play in Europe — when it exited a promising shale basin as the project turned out to be economically viable.
France, another country with major shale gas reserves, has banned fracking as it considers a process that could damage water tablets, and lead to air pollution and even earthquakes.
Elsewhere in Europe, there is huge public opposition to shale oil and gas development.
“The shale gas industry in Europe will be influenced in pace and feasibility by key factors such as environment and social factors, energy prices, gas demand and fiscal and regulatory regimes,” said John Avaldsnes, Ernst & Young’s EMEIA Oil & Gas Sector Leader in a report. “It is increasingly clear that the shale gas debate is a contentious one.”
Meanwhile, China has been trying to produce natural gas from its massive shale plays for years, but has been largely unsuccessful. After numerous failed efforts, it recently recruited Royal Dutch Shell and has now issued a number of licenses, but has little to show for it so far.
“Development of shale gas outside the US has arguably been disappointing to date and the same issues (including regulatory obstacles, infrastructure, logistics and skills challenges) may also influence the pace at which shale oil opportunities are pursued outside the US,” PwC admits.