When Peter Berkow (not his real name) was hastily evacuated from an oil facility in Libya and transferred to Alberta to work on his company’s oil sands project, he felt he had moved from one boomtown to another.
Libya was in the throes of a civil war and for a few months its crude production had come to a virtual stand still. In sharp contrast, Berkow easily got used to the mundane predictability of Canadian life coupled with a Mideast-type boom.
“I don’t want to face that nightmare again,” he said referring to his Libyan experience, requesting anonymity as he is not authorised to speak to the media.
While Libyan oil production has shot back up to pre-war levels, there is a much greater energy boom unfolding in North American regions such as North Dakota, Alberta, Pennsylvania, Saskatchewan, Montana and Texas. Thanks to hydraulic fracturing, a controversial method that is used to extract oil and gas, North American producers are able to extend life of mature wells and reach previously inaccessible so-called ‘unconventional reserves’ – a catch all phrase that includes oil sands, shale gas and oil and deep water reserves.
Consider the facts: US oil production has been at its highest level since 1998, while natural gas production reached its highest level ever. Meanwhile, the US became a net exporter of petroleum products for the first time in 49 years and is now actively looking to export natural gas to Asian and European markets.
In the north, the Canadian oil sands, considered the third largest crude reserves in the world after deposits in Venezuela and Saudi Arabia, have ramped up production and aim to be the fourth largest oil producer in the world by 2025.
Finally, Mexico, the world’s 8th largest crude producer, is also ramping up production, making the three friendly states powerful allies against OPEC influence.
Combined, North America oil production is projected to average 16.43 million barrels per day in 2012, larger than the 12-million bpd capacity of top producer Saudi Arabia.
Indeed, North America is expected to have the highest growth among all non-OPEC regions in 2012, as supply growth marks the highest level in terms of volume since 1970.
“The forecast calls for healthy growth from the US and Canada, as well as relatively steady supply from Mexico,” noted the latest OPEC report. “According to preliminary data, North America oil supply increased by 1.27 million bpd in the first half of 2012 compared to the same period in 2011. On a quarterly basis, North America oil production is expected to average 16.48 million bpd, 16.45 million bpd, 16.33 million bpd, and 16.46 million bpd, respectively.”
Citibank calls this change in global energy supply chain ‘transformational’.
“With no signs of this growth trend ending over the next decade, the growing continental surplus of hydrocarbons points to North America effectively becoming the new Middle East by the next decade,” Ed Morse, managing director and the head of global commodities research at Citigroup Global Markets, wrote in a report earlier in the year.
The US alone could add 6.6 million bpd to bring crude from nine million bpd at end-2011 to over 15.6 million bpd in 2020- 22. In total, North America as a whole could add over 11 million bpd of liquids from over 15 million bpd in 2010 to almost 27 million bpd by 2020-22, notes Morse.
Global investment data underlines that trend.
North America is expected to attract 26 per cent of the $1.23 trillion being poured into the global energy sector this year, according to energy consultants IHS International.
“The brief lull in expenditures in 2009 and 2010 caused by the Great Recession is behind us,” said David Hobbs, IHS chief energy strategist.
“Robust oil prices and the growth of North American unconventional gas – which already accounts for $128 billion in 2012 spending – will create new high water marks for investment in capital expenditure and operational expenditure that surpass pre-recession highs.”
Meanwhile, Middle East energy companies will spend $135 billion, or 11 per cent of total global spend.
Naturally, Middle East oil and gas companies have been distracted over the past two years due to the Arab Spring.
While Gulf states have ramped up production and made up for the shortfall in OPEC production, there are huge question marks over the future of other Middle East producers.
Iran’s oil and gas output has been falling due to crippling sanctions, while Syrian and Yemeni production has been decimated.
Iraq and Libya have ambitious plans, but their plans could be derailed by a range of investment issues, infrastructure challenges and political instability.
Hungry Asian consumers are also hedging their supply risks by investing in North America.
Burnt by their dependence on Iranian crude, Chinese, Japanese, South Korean and Indian state-owned companies are seeking investments in North America, Africa, thereby accelerating non-OPEC production.
Another key reason for the rise of non-OPEC production is OPEC’s own rising domestic expenditures and consumption.
Arab Petroleum Investments Corporation (Apicorp) data shows Saudi Arabia’s fiscal breakeven oil price stands at $94, while OPEC’s median fiscal breakeven price stands between $90-100.
In the past, OPEC’s low-breakeven fiscal price meant that many reserves such as the Canadian oil sands, Gulf of Mexico and Brazilian deepwater reserves, and Arctic resources were economically unviable.
But market observers are certain most OPEC producers will act to ensure oil prices remain high, making the more expensive non-OPEC production possible.
“Those whose fiscal break-even prices are higher than market price should not be expected to be comfortable with the status quo,” wrote Ali Aissaoui, senior consultant at Apicpro, in a research report.
“They would try and persuade the opposite side to lower the aggregate production ceiling and individual output quotas either pro-rata or otherwise. The expectation would be for market prices to increase to meet their higher break- even prices, even if that means losing some volume.”