Mar 25 2012
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The new Mideast?
The United States' hydrocarbon's production will eclipse Saudi Arabia and Russia as early as 2017, says Citibank. In fact the energy surplus points to North America effectively becoming the new Middle East by the next decade.
"North America has been the fastest growing oil and natural gas producing area of the world for the past half-decade," says Ed Morse, managing director of Managing Director and the Head of Global Commodities Research at Citigroup Global Markets, in a report.
"With no signs of this growth trend ending over the next decade, the growing continental surplus of hydrocarbons points to North America effectively becoming the new Middle East by the next decade; a growing hydrocarbon net exporting center, with the lowest natural gas feedstock costs in the world, supporting thriving exports of energy-intensive goods from petrochemicals to steel."
The US was the largest oil producer in the world, gaining that rank when Russian production collapsed at the start of the Russian Revolution and holding onto it until the 1970s -- US output peaked at 11.3 million bpd in 1970. Since then it has faltered, declining fitfully to a low of 6.8 million bpd in 2007, counting both oil and natural gas liquids (NGL); but 2007 saw the turning point, with current trends pointing to US supply overtaking Saudi Arabia and Russia. Last year, total production was up 2 million bpd above 2006 to 8.8 million bpd on average over 2011, with million bpd by end-2011.
Citibank says five sources of liquids growth could make North America the largest source of new supply in the next decade: oil sands production in Canada, deepwater in the US and Mexico (focused on the Gulf of Mexico), oil from shale and tight sands, NGLs associated with the production of natural gas, and biofuels.
"The US alone could add 6.6 million bpd to bring liquids from 9 million bpd at end-2011 to over 15.6 million bpd in 2020-22. In total, North America as a whole could add over 11 million bpd of liquids from over 15 million bpd in 2010 to almost 27 million bpd by 2020-22." notes Morse.
And there area plenty of reserves in store. Canadian oil sands hold 170 billion barrels of estimated oil reserves, second only to Venezuela and Saudi Arabia.
Underwater reserves in the Gulf of Mexico is estimated to be 30 billion barrels, but are said to be largely under-explored. Meanwhile, shale oil reserves in regions such as Bakken are set to hold 90 billion barrel, according to some estimates.
In addition, the U.S. shale gas reserves are said to be 862 trillion cubic feet - second only to China.
Added to the supply surge is the huge decline in the U.S.'s petroleum product consumption, due to the global financial crisis which has structurally depressed demand.
"The signs for US oil consumption for 2012 remain rather pessimistic and dependent on the development of the economy," says OPEC in a new report. "Should US oil demand show any further decline in the next three quarters, then this would change the picture for the global oil demand growth forecast."
But overall, demand is in perpetual decline having fallen substantially between 2005 and 2011, with year-end 2011 data pointing to a drop of 1.5 million bpd over the last seven years.
"Going forward, demand could fall by as much as an additional 2-m b/d due to demographic changes, policies on fuel efficiency and the mass commercialization of new technologies, countered somewhat by continued economic and population growth," writes Morse.
In addition, the massive development in shale gas in the United States is set to make the country into an exporter of liquefied natural gas, competing with Qatar, Algeria and other Middle East gas producers.
Citibank call this change in gas supply dynamics 'transformational' both domestically and globally.
Indeed, North America could act as the swing supplier due to its proximity to Europe, South America and Asia.
"Further, if the wide price discount between gas in the US and overseas were to persist, then the US could maintain its re-found role as a base-load gas exporter. Gas exports from Alaska, shut down a year ago, are now resuming, and total gas exports from the continental US could perhaps rise to as much as 5 billion cubic feet per day by the end of the decade, although some 15-Bcf/d of export terminals are now being planned."
This is not great news for Middle East oil and gas producers who have played the role of swing producers for the past few decades, effectively wielding tremendous influence over crude prices.
The North American trajectory is also in sharp contrast to slowing growth in Opec production, which are facing a slowdown.
There is a real danger that Iran, the second largest OPEC producer, would suffer long-term due to the crippling sanctions. Analysts say at least 800,000 barrels of per day of Iranian crude could be wiped off the market over time if the sanctions continue to impact on the country's oil production capabilities.
Saudi Arabia has recently noted that it may hold back on its production target of 15 million bpd from its current 12.5 million capacity, notably due to the rise in U.S. shale oil.
For now though, OPEC production is at an all-time high.
Total OPEC crude oil production averaged 315,000 bpd in February, according to IEA data, led by a three-decade peak in Saudi output and a sharp recovery in Libyan production.
In fact, Saudi oil exports to the United States have reversed a terminal decline, rising 25% since mid-2008 over the past few months. The U.S. has been trying to contain high gasoline prices at the pump which is hurting President Barack Obama's bid for a second term in the White House.
Indeed, Saudi Oil Minister Ali Al Naimi is going to great lengths to ensure OPEC remains the premier supplier of crude at the moment.
"If you believe Hormuz will be closed, I will sell you the Empire State or the Egyptian pyramids," Ali al-Naimi told reporters. "I want to assure you that there is no shortage of supply in the market. OPEC is supplying what it needs, we have capacity, additional reserves of 2.5 million barrels" a day."
Al-Naimi said OPEC producers 'fear' oil prices could reach the 2008 highs of $147 and are making great efforts to calm down the market.
But these are short-term dynamics masking the long-term seismic changes in the industry.
SAUDI AND QATARI RELATIONS WITH THE U.S.
The U.S. oil and gas bounty would also change its special relationship with Saudi Arabia, the world's largest oil producer, and Qatar, the biggest producer of LNG.
A Rice University study notes that the changing dynamics in the oil and gas market could bring Russia, Saudi Arabia and Qatar closer together to counter renewed U.S. dominance.
Russia is currently free-riding on high oil prices, but was at the receiving end in the mid-1980s when Saudi Arabia was engaged in a price war. It has also been hurt by competition from Qatar for European and Asian markets.
"Will Russia be able to form coalitions with these two key players in order to avoid price wars? Alternatively, will its stronger, semi-privatised oil industry of today better position Rusia to withstand and even win a potential price war?," ask Songying Fang, Amy Myers Jaffe and Ted Temzelides, a Rice University professor in a recent study.
But while the three analysts argue that Saudi Arabia and Qatar are more likely to preserves their decades-old strategic alliance with the U.S., new geo-political realities could throw up new alliances.
RISING MIDEAST DEMAND
Another key factor that hurts Middle East producers is their own rising demand of oil and gas.
Saudi Arabia is the largest oil-consuming country in the region and also has the highest annual growth in the Middle East, notes OPEC in its monthly report.
"Given its energy-intensive projects, Saudi oil demand is expected to grow by 0.12 mb/d in 2012, to average 2.7 mb/d.. But it will drop slightly this year, losing 0.01 mb/d. Overall, Middle East oil demand is forecast to grow by 2.4% in 2012."
The International Monetary Fund notes that oil consumption is biting into the region's ability to export.
While MidEast share of global oil consumption amounted to just 9% in 2010, its share in global oil consumption has been increasing rapidly over the past decade--to a large extent as a consequence of the region's economic growth, but also likely supported by low oil prices in many countries in the region.
"Particularly striking has been the region's oil consumption over the past two years: oil consumption growth in the Middle East easily outpaced that of other regions in 2009 and was basically at par with Asia's consumption growth in 2010," notes the IMF.
The next few decades would alter the global oil and gas market and that could also make new demands on OPEC and its member countries.
One possible outcome of this fossil fuel transformation is greater upheavals and ultimately democraticisation in the Middle East. While many oil and gas rich countries in the region have used their petrodollars to raise their citizens' wages and keep unrest at bay, in the future they may not have the same fiscal luxury to throw money at problems.
Even without greater political democraticization, there could be greater openness in economies which offers greater social and economic freedoms as the region moves away from the heavy dependence on hydrocarbons.
That may be an unpalatable thought for many current regimes, but those who can see it coming have a chance - when the going is good - to embrace that change.
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