OGJ Washington Editor
WASHINGTON, DC, Feb. 8 -- Political unrest across North Africa may have fueled short-term global crude oil price increases but likely won’t have the same long-run impacts as supply and demand changes in response to economic growth, experts told the US Senate Energy and Natural Resources Committee on Feb. 3.
“The turmoil in Egypt has raised anew the concerns about the geopolitical stability of world oil supplies,” said James Burkhard, managing director of IHS Cambridge Energy Research Associates’ global oil group. The Suez Canal and Suez-Mediterranean (Sumed) Pipeline make the country a major transit point with combined oil flows of 1.7-3.3 million b/d in recent years, or up to 3.8% of total world production, he conceded.
But Burkhard also noted that the pace and distribution of worldwide economic growth has created what CERA terms a “global redesign” affecting the balance of economic, political, and economic power. Oil demand, supply, and price will be key variables that shape this redesign, he said.
“Oil prices are in a range considerably higher than in the past,” Burkhard stated. “There are many reasons, but the most important reason of all is the change of the world economy and rise of major new, dynamic growth centers. Oil is our largest source of energy—about 37% of total US energy—and is essential to personal mobility, commerce, and trade. Its price reflects the global economy—the ups and downs, the surprises, and shifting expectations about geopolitics, technology, and economic growth.”
Roger Diwan, partner and head of financial advisory operations at PFC Energy, also indicated that growing turmoil in the Middle East was having an immediate bullish impact on crude prices, but added that the Washington-based energy policy consultancy believes it will not affect supplies.
“Protests have spread across much of North Africa, as well as Yemen, but the major oil-producing countries of the [Persian] Gulf states have seen little in the way of unrest,” he said. “Bolstered by strong balance sheets routinely leveraged to lower political unrest, and still enjoying the support of many of its citizens, the Gulf countries will likely have no difficulty keeping regimes, oil supply, and still ample spare capacity intact,” he said.
Diwan added, “And even if in more oil-producing North African states the protesters achieved a Tunisian-style victory, a lack of cohesiveness regarding the next step would be unlikely to dislodge the state apparatus, particularly that associated with oil production and marketing or, in the case of Egypt, disruption in Suez shipments.”
That spare capacity could be a significant difference between conditions now and in 2008, when crude oil prices spiked above $100/bbl by midyear before plunging dramatically in the second half, other witnesses testified. It also could increase the Organization of Petroleum Exporting Countries’ influence on global markets because those producing nations are where most of that spare capacity is located, they said.
Richard H. Jones, deputy director of the International Energy Agency in Paris, said IEA’s latest forecast projects OPEC’s share of global supplies rising to 50% in 2035 from a current 40% as production in most non-OPEC countries has peaked or will soon peak.
“These trends occur against the backdrop of an industry in flux,” Jones said. “Opportunities for international oil companies, which have historically dominated oil development, are diminishing with the growing role of national oil companies and fewer reserves in accessible basins outside OPEC countries. Oil market challenges are further exacerbated by the prospect of accelerating decline rates for individual oil fields, particularly in non-OPEC countries, including Mexico, a major exporter of crude oil to the United States.”
To meet new demand growth and offset this declining production, gross capacity more than six times Saudi Arabia’s present capacity will be needed by 2035, Jones said. “The world’s total endowment of oil is large enough to support the projected growth in output, but it will require substantial levels of investment and development of more technically challenging and unconventional resources,” he told the committee.
Domestically, the US Energy Information Administration, in its 2011 Annual Energy Outlook reference case, expects oil production to climb from 5.4 million b/d in 2009 to 5.7 million b/d in 2035, most from more enhanced oil recovery and oil-bearing shale plays onshore and deepwater drilling in the Gulf of Mexico, according to EIA Administrator Richard G. Newell. Cumulative production in the Lower 48 is the same as in the 2010 AEO’s reference case, but more oil is expected to be produced onshore and less offshore, he added.
“Offshore oil production in AEO 2011 is lower than in AEO 2010 throughout most of the projection period because of expected delays in near-term projects, in part as a result of drilling moratoriums and associated regulatory changes, and in part due to the change in lease sales expected in the Pacific and Atlantic Outer Continental Shelf, as well as increased uncertainty about future investment in offshore production,” Newell said in his written statement.
As with natural gas, applications of horizontal drilling and hydraulic fracturing techniques have allowed significant development of oil-bearing shales, Newell continued. “With AEO 2011 incorporating five key shale oil plays (as opposed to two in AEO 2010), oil production rises significantly across the country where shale oil is being produced, including the Rocky Mountains (primarily from the Bakken shale), the Gulf Coast (primarily from the Eagle Ford and Austin Chalk plays), the Southwest (primarily from the Avalon play), and California (primarily from the Lower Monterey and Santos plays),” he said.
EIA’s long-term outlook sees oil prices rising gradually as global economies recover to an average real price in 2035 of $125/bbl in 2009 dollars, Newell said. “The degree to which non-OPEC and non-[Organization for Economic Cooperation and Development] countries restrict access to potentially productive resources contributes to world oil price uncertainty,” he observed. “Other factors include OPEC investment decisions, which will affect future world oil prices and the economic viability of unconventional liquids.”
Breaking shales’ code
Diwan contends that higher prices actually have stimulated development of new technologies to recover crude from previously inaccessible sources. “What we have seen in the US in the last 5 years has been phenomenal,” he said. “Natural gas prices increased and led producers to drill more wells. That brought capital, resources, and technology together and broke the code of the shales for gas. That moved to oil, where drilling was dead onshore for 10 years in the US. Higher prices changed this.”
Diverse supplies will be the key to improving US energy security, starting with a more continental strategy which incorporates Canada, Burkhard suggested. “It’s clear that consistent policies matter,” he told the committee. “Some countries have successfully stimulated the development of new technology in this way. Consistency in a long-term approach that fully considers demand and supply seems like the best approach.”
Asked if adopting US President Barack Obama’s proposal to end current federal oil tax incentives would have serious economic consequences, Newell said that EIA is evaluating the matter and expects to issue a report. Burhkard pointed out that US producers have overseas competitors which are either subsidized or fully owned by foreign governments. All are contending with higher costs, he added.
“As oil prices rose and investment in new supplies increased for much of the past decade, so did demand for the people and equipment needed to find, develop, and produce oil,” he said in his written statement. “But the previous legacy of more than two decades of low oil prices and industry consolidation meant a ‘missing generation’ in the energy chain—a generation of engineers, scientists, and others who skipped entering the petroleum industry. As a result, shortages of equipment and personnel dramatically raised the cost of developing an oil field.”
Burkhard said that IHS CERA’s Upstream Capital Costs Index, which he described as “sort of a consumer price index for the global oil industry,” illustrates what happened because it doubled from 2005 to 2008. “In other words, companies had to budget twice as much in 2008 as they did in 2005 to develop a barrel of oil,” he explained. “Adding to the cost pressure were increasingly heavy fiscal terms on oil investments in the former of higher taxes and greater state participation globally in oil projects. Costs did decline in the aftermath of the great recession and subsequent fall in oil prices, but since the middle of 2010, they have been on the rise again and consequently stand close to their peak in 2008.”
Contact Nick Snow at firstname.lastname@example.org.