Saudi Arabias recent announcement that it is to drill seven test wells for shale gas throws a spotlight onto the changing dynamics of the global energy landscape.
Saudi Aramco has commenced a search for shale gas in the northwest of the country and also is looking for unconventional resources such as sour gas in the Eastern Province and the Empty Quarter.
Rising domestic energy demand has lent urgency to the need to maximise and develop gas reserves across the Gulf for power generation purposes. However, significant obstacles must still be overcome if the region is to successfully diversify its domestic energy mix.
Beginning in the late-2000s, a combination of technological advances and political choices has set in motion what Amy Myers Jaffe labels a hydrocarbon-driven re-ordering of geopolitics. By the 2020s, she argues, the capital of energy will likely have shifted back to the Western Hemisphere, where it was prior to the ascendancy of Middle Eastern mega-suppliers in the 1950s. Along with other macro-shifts such as the Obama administrations pivot to Asia, this could yet portend a recalibration of US interests in the Middle East.
The energy revolution already is occurring as new technologies such as horizontal drilling and less invasive hydraulic fracturing techniques are making it possible to unlock the vast amounts of unconventional hydrocarbons deposits in the Americas, which amount to an estimated 2.4 trillion barrels of unconventional oil in Canada, a further two trillion in the US, and two-trillion plus in South America. Together, these deposits - which encompass on-land shale rock, oil sands, heavy oil formations, and formerly hard-to-reach offshore deposits such as the pre-salt deepwater reserves off Brazils Atlantic coastline - dwarf the estimated 1.2 trillion barrels of conventional oil reserves in the Middle East and North Africa.
This is the challenge that policymakers in the Gulf states now grapple with. For decades, the Gulf Co-operation Council (GCC) states have benefited from their comparative advantage in conventional hydrocarbon deposits.
The supergiant oilfields discovered between the 1930s and the 1950s are still the workhorses of the Gulf and remain the largest reserves of oil ever discovered, and were relatively cheap to recover and exploit. But no major new discovery has been made in recent decades, and even Qatars enormous non-associated gas supplies in the North Field are subject to a moratorium on further development to prevent over-exploitation.
Even if large deposits of unconventional oil and gas are located, the task of extraction looks to be a costly and difficult project. Long-term infrastructure and investment will be needed in the remote areas where exploration is currently taking place, and lack of abundant water supplies will pose problems for hydraulic fracturing. This utilises vast amounts of water, chemicals and sand in order to free trapped hydrocarbons, but water tables across the Gulf are already dropping alarmingly in response to over-utilisation. Officials would do well to recall how attempts to attain food security in Saudi Arabia had to be scaled back in 2008 as it became apparent that irreversible damage was being done to the countrys aquifers.
Other difficulties also lie ahead. Domestic gas prices in the Gulf are too low to make developing local deposits economically feasible, and while the high price of crude oil does allow producers to absorb the costs of exploration, they are vulnerable should prices fall and remain low for any significant period of time.
Meanwhile, reservations remain about inviting in the international oil companies that possess the technological expertise that could unlock new deposits or prolong the life of existing fields. These challenges have stalled Project Kuwait and prevented the investment necessary to extract the hard-to-reach heavy oil and sour gas reserves that have recently been discovered.
With such transformative shifts taking shape, officials in the GCC states can no longer be confident that the region will remain at the centre of the global energy balance. While the Gulf states remain at the forefront of technological advances in conventional energy extraction, they already are lagging behind the new entrants in the Americas and Australia.
Robust economic growth and surging demand from Asia might prove a short-term panacea but it will not mask the challenges that lie ahead if the Gulf states are to adapt to a changing global environment.
