On the Global Implications of Shale: Setting the Scene

You have not heard from me for a while. In part, because we are busy preparing a new Energy Outlook, this time out to 2035 (and to be launched on January 15, 2014). But to some extent it was also because we are trying to get our heads around the potential global implications of what we are seeing in global shale oil and gas developments, based on last year’s Energy Outlook.

The result was a somewhat lengthy write-up.

To make this more digestible, I will publish it in instalments. There is a first part, setting the scene, and then five parts dealing with five likely global implications: (i) on global oil and gas markets; (ii) on a new role for local policy; (iii) on the geopolitics of energy; (iv) on the global economy; and, last but by no means least, (v) on the environment.

So here goes. This is part one, setting the scene.

Setting the scene

In a previous blog post, I addressed some of the reasons for why the shale oil and gas “revolution” happened in the US and Canada, and not elsewhere, in countries with equally ample resources. The short explanation was - it is all about competition.

Innovation is involved in unlocking these resources, and so it will take time to bring them to market in countries that lock themselves out of the free flow of investment and ideas, or that do not allow for competition at home. The large scale commercial production of oil and natural gas from shale itself may be new, but there is nothing new about this principle in the history of our industry – or, if one thinks about it, the history of any industry.

Meanwhile, production in North America keeps rising. And shale is changing the broader landscape: No one doubts anymore that the country will become a natural gas exporter in the not-so-distant future. Total oil imports have been cut by almost half. With crude exports still legally constrained, the US now reaps the benefits of cheaper domestic crude by exporting refined products instead: The country has switched from net imports of 2 million barrels per day (Mb/d) of refined products as recently as 2007 to net exports of 1.2 Mb/d most recently. Not only is energy security benefitting: of all the countries in the world, the US last year had the biggest increase in oil as well as gas production – it also had by far the largest decline in CO2 emissions, courtesy of the unprecedented replacement of coal with natural gas in power generation, enabled by shale gas. (Natural gas fired power generation has about half the emissions of coal fired generation).

Small wonder that the “shale revolution”, or unconventional oil and gas in North America more broadly, is slowly becoming recognized as consequential beyond this region, beyond energy markets, and for years to come. And yet, the assessment of global strategic implications – for energy security, geopolitics, the global economy, or for the environment - is still trailing actual developments; and perhaps unsurprisingly so, given the uncertainty around future production growth.

What are some of these likely strategic, global implications? To discuss this, one needs a sensible benchmark.

What to expect?

There are two aspects that make shale resources different from conventional oil. First, they appear to be widely distributed across regions. Assessments are still in their infancy, but all available tallies show technically recoverable oil and gas shale resources spread across Asia, Australia, Africa, South America, Europe and Eurasia –closer to consumption centres than conventional oil. Mind you, we know preciously little about the economic recoverability of these resources.

Second, most forecasters - ourselves included - predict production growth to remain concentrated in North America for the foreseeable future, despite the relatively even spatial distribution. The reasons are the lack of access, competition and thus innovative fire-power in other countries; and, related, a lack of infrastructure, which will take time to build.

The figure above illustrates both points. The left hand side shows a production profile, taken from BP’s Energy Outlook 2030, published in January this year. Based on our view of geology, infrastructure requirements, drilling activity as well as the speed with which shale resources are likely to be accessed in various locations, it shows global production from shale oil rising to about 9% of global oil production by 2030 - from virtually nothing just a few years ago.

Three characteristics are worth mentioning: (a) Production growth continues to be driven by North America; (b) growth will remain positive but slow down after about 2030 from the very high rates today; and (c), other countries will enter the game – notably Russia, China, Argentina and Columbia – but their contribution will not grow fast enough to reverse the general pattern of slower growth after 2020.

Next, we compared this freshly minted forecast to those of others, shown by the shaded areas on the right hand side of the figure above. It turns out (and at the time came as a surprise to us) that BP’s forecast is conservative indeed. It lies at the very low end of the range of all other forecasts. In fact, we had trouble finding lower estimates.

Our forecast is not only lower; the slowdown of global tight oil growth after 2020 is also not widely shared. Many others predict steady growth, or even an acceleration out to 2030.

The conservative nature of this forecast matters. Obviously, given the current range of uncertainty, any discussion of global implications is - explicitly or not – based on a production outlook. Ours implies that the consequences discussed below have to be amplified, should the more optimistic predictions have it right.

So what are these implications? Based on this conservative benchmark, I can think of at least five...

Continue reading: On the Global Implications of Shale: Oil and gas markets

Ana Auz-Law

Innovative Technology Leader focusing on Manufacturing

9y

Good article, enjoyed reading it. You might want to make a correction when referring to the Republic of Colombia, not Columbia.

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