New supplies would represent a paradigm shift in global oil trade

Abu Dhabi:A shale oil revolution made possible by the pioneering horizontal drilling and hydraulic fracturing technology may become the game changer in balancing the global energy market in the immediate future, according to experts.

As more countries get inspired by the US and step up their exploration efforts in shale, the global oil market looks poised to get flooded with new supplies. Given that fresh producing wells are set to come on stream in Canada, Iraq, Brazil and the US, there will be enough surplus oil on the market soon, to keep prices in check.

“There’s already enough shale oil being produced in the US to affect the global oil market. There are also shale deposits in China and if they can produce this oil relatively cheap, that would represent a paradigm shift in global oil trade,” Tamsin Carlisle, a person closely tracking the world oil markets for energy information services provider, Platts, told Gulf News.

Two of the world’s largest economies, the US and China are by far the biggest importers of crude oil.

While shale oil is not scaring the producers yet, Carlisle says they are certainly discussing the ramifications of what it may do to the global oil supply and demand balance.

“Whilst, a high oil price is required to justify investment in unconventional oil such as shale and deepwater, current prices are still significantly above marginal cost estimates. In the long term we expect oil production from both conventional and unconventional source to increase at a faster rate than demand, cutting oil prices to about $70 per barrel by 2020,” said Thomas Pugh, Commodities Economist at London-based Capital Economics.

Pugh said increases in production from shale oil in North America would reduce demand from the Middle East, which could leave some countries with a significant budget shortfall.

“However, the high price of oil required to achieve American independence would mitigate any revenue falls and the Gulf producers will remain the lowest cost producers so will still make substantially more profit per barrel than producers of shale oil. What’s more, many Middle Eastern countries are running large budget surpluses or have huge sovereign wealth funds to fall back on, meaning the effect is likely to be smaller than it may first appear.”

Environmental concerns, though, could inhibit fracking in some countries.

“There are concerns about earthquakes and contamination to groundwater which have prevented development in the European Union. These concerns have mostly proved to be groundless in the US but some EU countries remain sceptical. This may well delay or even prevent large scale fracking in the EU,” Pugh noted.

Price impact

Though it will take a number of years for shale oil to start to significantly bring down global oil prices, analysts said it is already having an effect in the US where oil prices are still below international prices. “We don’t see US shale oil production as having a major role in dragging down global oil prices in 2013, but a larger role in the next few years,” said Thomas Pugh, Commodities Economist at London-based Capital Economics.

According to the Energy Information Administration, imported liquid fuels as a share of total US liquid fuel use reached 60 per cent in 2005 before dipping below 50 per cent in 2010 and falling further to 45 per cent in 2011. The import share is expected to continue to decline to 34 per cent in 2019 and then rise to about 37 per cent in 2040, due to a decline in domestic production of tight oil that begins in about 2021.

“Rise of non-Opec supply will mean relative decline in Opec influence. We expect Opec to restrict output growth in order to support energy prices,” commented Giyas Gokkent, National Bank of Abu Dhabi’s chief economist.
Published on June 7, 2013 by News Source in Economy, Energy, Fracking, Shale Industry, Uncategorized