US shale: A threat to Saudi dominance?

13 November 2012
OPEC finally acknowledged the very clear and present danger of North American shale oil and gas production.

In its latest report, the oil exporters group expects demand for its crude to fall by 1.4 million by 2016 due to an unstoppable surge in North American oil production.

The group is projecting demand for its crude to shrink from 31.1 million barrels per day in 2012 to 29.7 million bpd by 2016. Meanwhile, United States and Canada production will rise from 13.5 million bpd in 2012 to 15.2 million bpd in 2016.

"In previous WOO Reference Cases, no significant shale oil contribution to liquids supply was envisaged," OPEC said. "This year a rise in the importance of shale oil is expected. However, it should be noted that future production is likely to be beset by several constraints and challenges, such as environmental concerns, questions over the availability of equipment and skilled labour, rising costs and steep well-production declines."

"Nevertheless, resource development is moving rapidly in the US and production has markedly increased: supply from Bakken, Eagle Ford and Niobrara in the US is already over one million bpd, and despite severe decline rates, emerging forecasts now see oil shale supply rising rapidly."

While OPEC is slightly guarded about its comments on U.S. shale oil production, rival International Energy Agency has little doubt about the impending dominance of North American, and especially U.S. crude production.

In fact, the IEA believes it could disrupt the status quo of global energy markets.

"By around 2020, the United States is projected to become the largest global oil producer (overtaking Saudi Arabia until the mid-2020s) and starts to see the impact of new fuel-efficiency measures in transport," said the IEA.

"The result is a continued fall in US oil imports, to the extent that North America becomes a net oil exporter around 2030. This accelerates the switch in direction of international oil trade towards Asia, putting a focus on the security of the strategic routes that bring Middle East oil to Asian markets."

The IEA expects the United States to achieve self-sufficiency and become an energy exporter, threatening Saudi, Russian and wider OPEC dominance in the market.

United States is not the only country ramping up production. Canadian oil sands, natural gas liquids, and a rise in Brazilian deepwater production would raise non-OPEC production up to 53 million bpd by 2015  from under 49 million bpd in 2011.

Not surprisingly, Saudi Arabia itself is trying to get a handle on the shale phenomenon.

In fact, Saudi Arabia Basic Industries Corp. is eyeing investments in U.S. companies focused on shale gas, according to Mohamed Al-Mady, the company's chief executive officer.

Saudi Arabia is also reportedly looking at exploring for shale oil and gas reserves offshore near its own borders.

Meanwhile, the kingdom's 900,000 bpd Manifa offshore field is expected to come on line by 2014.

Saudi Aramco is also upgrading the Safaniyah field. And Chevron is working on testing steam injection in the Wafra oilfield in the Neural zone, which could turn into the largest largest steam-injection project in the world - if approved.

However, OPEC production would surge again as non-OPEC production plateaus post-2020.

"Output from OPEC countries rises, particularly after 2020, bringing the OPEC share in global production from its current 42% up towards 50% by 2035," notes the IEA. "The net increase in global oil production is driven entirely by unconventional oil, including a contribution from light tight oil that exceeds 4 million bpd for much of the 2020s, and by natural gas liquids. Of the USD15-trillion in upstream oil and gas investment that's required over the period to 2035, almost 30% is in North America."

OPEC is investing heavily in its infrastructure to maintain and increase supply.

Member countries are investing USD270-billion over the next five years in 116 projects focused on the oil and gas sector, which would take its spare oil capacity to 5 million bpd by 2016, helping maintain its position as a swing and influential producer of crude.

Still, OPEC countries need to rein in their domestic consumption of crude which is cutting into their crude exports.

The Middle East crude demand rose by 60% between 2000 and 2011, at an average rate of 4.2%, or 225,000 bpd, per year, more than every other region except for China.

The IEA says Middle East demand could slow to 1.4% but will depend heavily on governments reducing subsidies and switching from oil to other energy sources to generate electricity.

"Failure to do so would have far-reaching implications for the key producers' capacity to export oil and fuel regional development and social programmes - not least in Saudi Arabia," said the IEA.

Much of OPEC's production renaissance will depend on Iraq.

The IEA expects OPEC output would rise from 35.7 million bpd to 46.5 million bpd in 2035, with Iraq leading OPEC production.

"Iraq is poised to be by far the largest contributor to growth in world supply," notes the IEA. "In the Central Scenario for Iraq, which forms part of the overall New Policies Scenario, production grows from 2.7 million bpd in 2011 to 6.1 million bpd in 2020 and 8.3 million bpd in 2035. A High Case anticipates faster growth to more than 9 million bpd in 2020, closer to what is being envisaged in the signed contracts with international oil companies in Iraq."

The UAE will also remain a major crude player and is expected to raise its capacity to 3.5 million bpd to 2018.

"Development of a new field - Qusahwira - and the extension of some old giants - Bab and Upper Zakum- are currently being undertaken by the Abu Dhabi National Oil Company and its partners, which between them are expected to add about 250,000 bpd by 2014 and another 250,000 bpd by 2016.

"Other companies are also planning capacity increases, though this is likely to take place only after decisions are taken on the renewal of the concessions, due in 2014. National production is projected to reach 3.7 million bpd in 2035, up from 3.3 million bpd in 2011, with most of the increase coming from NGLs."

However, other OPEC stalwarts such as Iran and Kuwait face an uncertain future.

International sanctions have set the Iranian industry back significantly, and the IEA expects Iranian production to fall from 4.2 million bpd in 2011 to 3.3 million bpd by 2020, but could recover to reach 4.5 million bpd by 2035, as Tehran returns to the international markets and its conflict with the West is resolved.

"The outlook for oil production in Kuwait remains uncertain, given continuing political opposition to allowing foreign companies with the requisite expertise to develop the country's heavy oil resources, says the IEA, adding that it expects production to remain virtually flat or rising slightly over the forecast period.

With North America virtually self-sufficient, Middle East and OPEC producers will be looking to Asia to sell their wares. In fact, U.S. oil imports from the Middle East will fall from 2.8 million bpd by 2000 to a mere 300,000 bpd by 2025.

Asia will come to Middle East's rescue, with China accounting for 50% of global crude demand.

China's oil demand will rise from 9 million bpd in 2011 to 15.1 million bpd by 2035, while India will more than double demand from 3.4 million bpd last year to 7.5 million by 2035. Both forecasts take into account the two countries efforts to diversify their energy sources and make extensive use of alternative energies.

One crucial difference between the OPEC and IEA reports is the reserve estimates.

OPEC believes 81% of the crude reserves are located in OPEC countries and seems to underplay unconventional oils such as shale.

"It is important to understand the potential infrastructure challenges for shale oil, particularly with regard to transportation and the specific capital needs to develop these resources, both human and physical," OPEC stated.

"Moreover, environmental concerns are a further constraint to the future development of shale oil. For example, hydraulic fracturing, required for the development of shale oil, involves large volumes of water, and associated concerns about possible pollution, as well as a number of other environmental impacts, such as heavy equipment traffic, noise and air pollution."

Meanwhile, the IEA notes that unconventional oil which is primarily located in Americas stands at 3.19 trillion, exceeding Middle East dominated conventional oil of 2.67 trillion.

Worryingly for OPEC countries, the IEA believes that the unconventional reserve figures could be revised upwards.


OPEC countries need to do some hard thinking and accelerate their economic reform agenda to meet the challenges in the face of a changing global energy map.

It could be a blessing in disguise for Middle East oil producers as they wrestle with domestic unrest. The American resurgence could help fast-track domestic reform and help OPEC countries transform into more nimble oil and gas exporters.

© 2012


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