In its February 15 report ‘Resurging North American oil production’, Citigroup’s analysts claimed that the shale gas boom was set to morph into a shale oil boom. The report said: “The concept of peak oil is being buried in North Dakota, which is now leading the US to be the fastest growing oil producer in the world. The belief that global oil production has peaked, or is on the cusp of doing so, has underpinned much of crude oil’s decade-long rally (setting aside the 2008 sell-off)”.
Only 14 days later however the US Energy Department, which in January cut its estimates for likely recoverable shale gas from the USA’s giant Marcellus Basin by 66% from previous, released its report on world oil market trends with an array of peak oil-friendly facts and figures. Its 29 February report outlined that OPEC spare oil production capacity dropped 33% in the first two months of this year compared with the same period in 2011. The 12 OPEC member states had an average 2.5 million barrels a day spare capacity during January and February, down from 3.7 million b/d a year earlier. The report also gave baleful news for advocates of Iran bombing or oil embargoes: it showed that global oil consumption averaged 3 Mbd more than global output, when Iran is excluded from the calculation, and about 500 000 b/d more when Iran is included.
The global oil market is therefore tighter than ever, is running on inventories and refinery gains, OPEC quota “cheating” or overproduction, and cannot do without Iran.
The shrinking spare capacity of the OPEC states, of 2.5 Mbd, is almost exactly what Iran was exporting until late 2011, following a year average 2.6 Mbd in 2010, but since 2011 and for reasons only partly related to sanctions, and closer related to depletion, its oil output is falling: Iran’s net exports and export supply capacity may stand at only 2.2 Mbd today. Some sources suggest even less than that. In 1976, Iran could produce 5.75 Mbd and export far more than 4 Mbd to a world market that, at the time, consumed about 62 Mbd compared with 89.7 Mbd today. Explaining this while denying depletion and the impact of oil consumption growth in exporter countries and worldwide is mental gymnastics !
THE GLOBAL GAS SHIFT
The Citigroup report could likely be taken as a morale-raising exercize for equity punters looking for the right news to continue boosting US equity values, but it missed out on the real mega-shift driven by shale gas and stranded gas-only resources, LNG, and the whole gas asset value chain. Shale oil, production of which will in no way “explode” for many reasons such as constant drilling needs, rapid decline from peak well output and water limits on expanding output is at best an uncertain slayer of peak oil. The real shift is to gas.
The de facto shift away from oil, to gas, is the real strategy shift of the international majors, emerging country national oil companies (NOCs), energy companies in Japan and South Korea, and a growing number of OPEC and OAPEC NOCs.
All are vying for gas assets across the spectrum: shale, coalseam, stranded gas, pipeline and LNG transport capacities, gas condensate refinery capacity, and gas-to-oil technology development. The impact of this on the majors’ energy profile is already strong: in 2011 Exxon Mobil’s energy output was 49% gas and 51% oil, coal, and all other energy commodities, its gas energy footprint growing from 38% gas in 2005. For Shell, the shift is even bigger, and Shell is now close to 60% gas by energy output. These and other majors such as Total, ENI, and BP are crowding into the now accelerating shale gas development of Chinese and Indian resources, while China and India invest in US shale gas assets and global LNG supply expansion. China, estimated by the US EIA to have the world’s biggest shale gas reserves, has yet to produce it commercially, with Shell at end 2011 helping China National Petroleum Corp. sink the nation’s first horizontal well. Chinese energy companies such as Cnooc and China Petrochemical Corp. have invested more than $5.7 billion in so-called unconventional oil and gas assets overseas, especially the US.
India’s biggest overseas energy explorer, ONGC Videsh, is set to buy its first shale gas assets in the USA and plans to spend at least $1 billion on purchases. The company’s gas-dominated overseas energy asset buying strategy ranges from Mozambique to Russia to secure energy supplies for the world’s second-fastest growing major economy. Its entry into US shale gas lease buying, in competition with other major buyers including Exxon Mobil, BP and India’s Reliance Industries Ltd., has driven up valuations in the US as high as $25 000 per acre ($60 000 per hectare). Other overseas buyers of US shale gas assets include Japan’s Marubeni Corp. which in January bought a 35% stake in an acreage from Hunt Oil Co. for $1.3 billion, valuing the fields at about $25,000 an acre.
The global commitment to gas is clear: one main reason is that oil is difficult and expensive to find and produce, because conventional oil resources are depleting.
GLOBAL GAS IS AN UNSURE STRATEGY
For China, India and other Asian energy importers the gas shift is driven by simple economics: their currrent dependence on LNG imports is priced at rates as high as $15 per million BTU, to compare with US shale and conventional gas prices hovering near $2.60 in early 2012. Both China and India intend vastly expanding the role of gas in their energy economies. For China this translates to a goal of changing its energy mix from 66% coal and 20% oil, today, to at least 20% gas by 2030, from 5.3% today, using data supplied by the NDRC development commission. Indian goals for expanding the role of natural gas are very similar, raising its share in national energy to about 20% by 2030, compared with 5.6% in 2010 using data from Government of India.
The main goal of expanding gas in the energy economies of China and India is not primarily oil-saving, but coal-saving, for electricity production, although expanded use of gas in road and land transport is also certain for China and India. Outside the Asian giants, expanding gas supply is also not primarily aimed at oil-saving and also features electricity production, again for basic economic reasons. In regions of higher-cost bulk electric power supplies, especially Europe, traded prices are often highly volatile and can swing as high as 150 euro per 1000 kWh (1 MWh), or more, but are often set in a range, depending on national market at a monthly average near 50 – 55 euro/MWh, equivalent to about $21 per million BTU.
Also driving the gas strategy aimed at electricity production and sale, the development of renewable energy in Europe and the US, the sharp growth in nuclear power costs due to decommissioning of ageing reactor fleets, and the nuclear exit strategies of Germany and Switzerland (and effective exit strategy of Japan) will all drive electricity prices higher. European Union energy transition policy as set in member state REAPs (renewable energy action plans), in theory aimed at completely abandoning fossil energy by about 2050, has included feed-in tariffs to boost the growth of wind and solar electricity production. These incentives, with producers receiving as much as 25 euro cents per kWh or 250 euro per MWh in some countries, can be compared with oil energy: this is equivalent to oil energy at about $ 520 per barrel !
Also downstream but resolutely in the future, expanded electricity production from low cost gas and higher priced renewable energy sources is envisaged, by some, as enabling the operation of mass electric vehicle (EV) fleets, perhaps by as early as 2030. This in turn, if it was feasible, would heavily diminish the need for oil in the economy, but more importantly outlines a likely date range of strategic energy planners for when they believe oil’s role will significantly shrink.
The costs of developing mass EV fleets are daunting, but so also is the other implied, and emerging strategy operated by the energy majors and the NOCs of many countries. This features gas-to-oil (GTL) conversion and use of “wet gas”, containing oil, as feedstock for gas-based refineries producing liquid fuels. GTL is a very capital intensive technology with a long and economically unsuccessful track record, but with sufficiently cheap gas, and sufficient investment capital it may be possible to “ramp up” GTL production. Gas feedstock-based refineries are projected in a small number of regions with large nearby stranded gas reserves such as Australia’s north-west shelf, but costs remain very high.
OIL PRICES NOT SET TO DECLINE
The main conclusion on the horizon to 2017 is that oil prices are unlikely to decline, except under conditions of steep economic recession. Global energy company investment, in part due to the massive costs of gas asset development and acquisition, in part also due to investment in renewable energy and in the non-energy petrochemical sector, is making a de facto shift away from oil. High oil prices and earnings from oil are now more important than ever for energy companies needing to finance their shift into high-cost development of gas focused non-oil alternatives.
Within that strategy and to be sure, shale oil will have a role, especially in the US but rapid expansion of shale oil output is unlikely to compensate the tail-off in global net export supply of oil, at least to 2017 and probably to 2025, thus maintaining oil prices. High oil prices, taken as a “necessary evil” by consumers in many countries and insufficient to persuade or force them to shift to gas-fuelled cars, or EVs, have arguably helped set the path for global energy corporations away from oil. Their strategic shift is from limited oil resources and despite their high value, to the promise of hyper abundant gas resources despite their lower value, and high costs for conversion to liquid fuels.
Not ironically but through simple energy economics, oil becomes the “energy bridge” away from oil.
Andrew McKillop, Former Expert-Policy & Programming, DG XVII Energy, European Commission