PEAK OIL VERSUS SHALE OIL
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%, and nationwide shale numbers by 42% from previous EIA estimates, released its report on world oil market trends. This contained 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.
Iran's net exports and export supply capacity could be as low as 2.2 Mbd today: long gone are the days of 1976 when Iran could produce 5.75 Mbd and export more than 4 Mbd to a world market that, at the time, consumed about 62 Mbd compared with 89.7 Mbd today. OPEC's shrinking spare capacity of about 2.5 Mbd, is almost exactly what Iran was exporting until late 2011, following a year average 2.6 Mbd in 2010 but whatever happens, Iranian net export capacity and the straight majority of exporters able to export more than 1 Mbd will shrink. 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 be taken as a morale-raising exercize for equity punters anxious for news able to further boost 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. For a host of converging reasons, one of them peak oil, world energy is moving to gas. This will itself tend to lock-in oil prices at high levels, but will drive down gas prices - outside the USA where gas prices will rise.
Neither shale gas nor shale oil are threatened with any kind of resource pinch, but shale oil production will not "explode" the way Citigroup likes to imagine. Reasons include constant drilling needs, rapid decline from peak well output and water limits on expanding output. Shale oil is an uncertain slayer of peak oil. The real shift is to gas.
This de facto 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 is now building fast, and moving into unstoppable growth.
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 (XOM) 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 (RDS.A), the shift is even bigger, and Shell is now close to 60% gas by energy output, with several other former oil-focused majors following, such as Total (TOT), ENI (E), and BP (BP) which are crowding into the now accelerating shale gas development of Chinese and Indian resources
At the same time, China and India are buying US shale gas assets and investing heavily in 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 in US shale gas.
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.
GLOBAL GAS IS AN UNSURE STRATEGY
This spending means something: it means that energy deciders have concluded that oil is difficult and expensive to find and produce, because conventional oil resources are depleting, but gas reserves are abundant even if the development, transport and end-use of gas does not come cheap. For China, India, Japan, South Korea and other Asian energy importers the gas shift is driven by pure economics: their currrent dependence on LNG imports is priced at rates up to $16 per million BTU, to compare with US pipeline supplies at 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, up 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.
Making this gas shift an uncertain strategy not only includes an already budding, and certainly growing overcapacity in global LNG capacity. 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.
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. Gas focused energy companies will therefore need to compete for electric power production and transport assets, in markets where the entry price is high.
The gas strategy aimed at electricity production and sale is advantaged in regions including the US and Europe where tough environmental regulations, the development of renewable energy and the sharp growth in nuclear power costs due to decommissioning of ageing reactor fleets, the nuclear exit strategies of Germany and Switzerland (and effective exit strategy of Japan), will all drive power prices higher. Outside the US and Europe this is less sure, especially for China and India where high cost national gas grids must first be developed, before gas can ramp us.
Big energy strategists may also dream out loud that the concept of expanded electricity production from low cost gas ramping so fast it can support the operation of mass electric vehicle (EV) fleets, perhaps by as early as 2030. To be sure, this could heavily diminish the need for oil in the economy, but more important it outlines a likely date range of strategic energy planners for when they intend to pull the plug on oil and oil's energy 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, sufficient investment capital and continued technology progress it may be possible to expand GTL production from its current, tiny and high cost scale. 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 at around $10 000 per barrel-day capacity.
OIL PRICES NOT SET TO DECLINE
The main conclusion on the horizon to 2017 is 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.
Big energy's 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 value adding through electricity production and gas conversion to liquid fuels.
Not ironically but through simple energy economics, oil becomes the "energy bridge" away from oil.
Taking only the major role of world car, maritime shipping and aviation fleets, the global car fleet now very close to 1 billion has a slow predictable turnover and replacement rate, and is presently at least 98% oil and LPG fuelled. No sudden and radical shift is likely, making oil supply a continuing and basic need, critical for the world aviation fleet, but likely more easily substituted (by gas or coal) for world shipping fleets.
Given that oil saving's greatest potential is in transport, it is this sector that will likely be the most targeted by energy and economic planners in coming years - rather than the present massive focus on renewable-based electricity production, as gas becomes the favoured fuel for electricity production, linked with cogeneration in a growing number of countries.
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%, and nationwide shale numbers by 42% from previous EIA estimates, released its report on world oil market trends. This contained 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.
Iran's net exports and export supply capacity could be as low as 2.2 Mbd today: long gone are the days of 1976 when Iran could produce 5.75 Mbd and export more than 4 Mbd to a world market that, at the time, consumed about 62 Mbd compared with 89.7 Mbd today. OPEC's shrinking spare capacity of about 2.5 Mbd, is almost exactly what Iran was exporting until late 2011, following a year average 2.6 Mbd in 2010 but whatever happens, Iranian net export capacity and the straight majority of exporters able to export more than 1 Mbd will shrink. 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 be taken as a morale-raising exercize for equity punters anxious for news able to further boost 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. For a host of converging reasons, one of them peak oil, world energy is moving to gas. This will itself tend to lock-in oil prices at high levels, but will drive down gas prices - outside the USA where gas prices will rise.
Neither shale gas nor shale oil are threatened with any kind of resource pinch, but shale oil production will not "explode" the way Citigroup likes to imagine. Reasons include constant drilling needs, rapid decline from peak well output and water limits on expanding output. Shale oil is an uncertain slayer of peak oil. The real shift is to gas.
This de facto 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 is now building fast, and moving into unstoppable growth.
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 (XOM) 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 (RDS.A), the shift is even bigger, and Shell is now close to 60% gas by energy output, with several other former oil-focused majors following, such as Total (TOT), ENI (E), and BP (BP) which are crowding into the now accelerating shale gas development of Chinese and Indian resources
At the same time, China and India are buying US shale gas assets and investing heavily in 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 in US shale gas.
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.
GLOBAL GAS IS AN UNSURE STRATEGY
This spending means something: it means that energy deciders have concluded that oil is difficult and expensive to find and produce, because conventional oil resources are depleting, but gas reserves are abundant even if the development, transport and end-use of gas does not come cheap. For China, India, Japan, South Korea and other Asian energy importers the gas shift is driven by pure economics: their currrent dependence on LNG imports is priced at rates up to $16 per million BTU, to compare with US pipeline supplies at 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, up 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.
Making this gas shift an uncertain strategy not only includes an already budding, and certainly growing overcapacity in global LNG capacity. 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.
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. Gas focused energy companies will therefore need to compete for electric power production and transport assets, in markets where the entry price is high.
The gas strategy aimed at electricity production and sale is advantaged in regions including the US and Europe where tough environmental regulations, the development of renewable energy and the sharp growth in nuclear power costs due to decommissioning of ageing reactor fleets, the nuclear exit strategies of Germany and Switzerland (and effective exit strategy of Japan), will all drive power prices higher. Outside the US and Europe this is less sure, especially for China and India where high cost national gas grids must first be developed, before gas can ramp us.
Big energy strategists may also dream out loud that the concept of expanded electricity production from low cost gas ramping so fast it can support the operation of mass electric vehicle (EV) fleets, perhaps by as early as 2030. To be sure, this could heavily diminish the need for oil in the economy, but more important it outlines a likely date range of strategic energy planners for when they intend to pull the plug on oil and oil's energy 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, sufficient investment capital and continued technology progress it may be possible to expand GTL production from its current, tiny and high cost scale. 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 at around $10 000 per barrel-day capacity.
OIL PRICES NOT SET TO DECLINE
The main conclusion on the horizon to 2017 is 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.
Big energy's 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 value adding through electricity production and gas conversion to liquid fuels.
Not ironically but through simple energy economics, oil becomes the "energy bridge" away from oil.
Taking only the major role of world car, maritime shipping and aviation fleets, the global car fleet now very close to 1 billion has a slow predictable turnover and replacement rate, and is presently at least 98% oil and LPG fuelled. No sudden and radical shift is likely, making oil supply a continuing and basic need, critical for the world aviation fleet, but likely more easily substituted (by gas or coal) for world shipping fleets.
Given that oil saving's greatest potential is in transport, it is this sector that will likely be the most targeted by energy and economic planners in coming years - rather than the present massive focus on renewable-based electricity production, as gas becomes the favoured fuel for electricity production, linked with cogeneration in a growing number of countries.