World Oil Markets: Is US Set To Overtake OPEC?

SAUDI WARINESS

Don’t expect the Saudis and other OPEC countries to give up their influence on global oil markets easily.

As other OPEC countries faltered during the Arab Spring revolution, Saudi Arabia played the soothing role of the responsible and influential global supplier of crude to world markets and has earned global praise for ensuring oil prices don’t spiral out of control and derail fragile global economic recovery.

Saudi, and other influential suppliers such as Kuwait, UAE and Qatar, are securing long-term contracts with Asian customers to ensure demand security.

Earlier this year, South Korea’s Korea National Corporation’s took a 40 per cent stake in three oil production blocks in Abu Dhabi at a cost of $2 billion, which gives it access to 43,000 bpd.

Saudi Arabia is trying to invest in solar energy for domestic use to free up more crude for export purposes. It has also begun tapping its shale gas reserves in the Red Sea.

Oil services giant Baker Hughes estimates Saudi Arabia may hold the fifth-largest deposits of shale gas, after China, the US, Argentina and Mexico, with as much as 645 trillion cubic feet of recoverable reserves.

Crucially, Saudi Aramco owns half of Motiva Enterprises, which operates the United States largest refinery. The move has reversed the decline of Saudi oil exports in the US and gives the Kingdom a foothold in the burgeoning energy centre.

Kuwait, meanwhile, is looking to ramp up its oil production once the political climate improves, and is reportedly in talks with a Canadian company to take a stake in an oil sands’ project.

BERNSTEIN’S RESEARCH

Not everybody believes the North American production surge is a fait accompli.

A Harvard University Belfer Centre research notes that the biggest threat to North America output is a collapse in oil prices, especially as production surpasses demand during economic fragility.

“If an oil price collapse were to occur after 2015, a prolonged phase of overproduction could take place, because production capacity would have already expanded and production costs would have decreased as expected, unless oil demand were to grow at a sustained yearly rate of at least 1.6 per cent for the entire decade,” said Leonardo Maugeri, who authored the report Oil: The Next Revolution.

A bigger crisis that has already led to project delays is the backlash from the environmentalist movement. The green movement has painted the Canadian oil sands as the worst polluters of the planet and many aboriginal groups are staunchly against building pipelines across ecologically sensitive areas.

In the United States, opponents of hydraulic fracturing – or fracking – want oil companies to abandon the practice as there are fears it could lead to earthquakes or contamination of water tables.

“A revolution in environmental and emission-curbing technologies is required to sustain the development of most unconventional oils – along with strong enforcement of existing rules,” said Maugeri. “Without such a revolution, a continuous clash between the industry and environmental groups will force the governments to delay or constrain the development of new projects.”

Sanford C. Bernstein, an influential Wall Street research firm, has done the most authoritative study on shale oil and gas in the United States, and it is not convinced the North American surge is certain to be sustained.

Its research on Montana’s shale developments shows that while crude production has jumped in recent years, the wells have matured very quickly as well.

Within six years, 5,000 wells in Montana will mature, and production has fallen 38 per cent from its peak, noted Bob Brackett, a senior and well-respected researcher at Sanford C. Bernstein.

“Another constraint on shale oil growth is that its resource plays have well defined sweet spots with very attractive production rates,” the Bernstein reported.

“Once these sweet spots have been drilled, average quality of remaining locations falls and a higher price is required to support drilling.”

It would take some time and a number of breakthroughs for North American production to offset OPEC.

Another key factor favouring OPEC is the sheer size of its resource base. The 12-country group combined is sitting on 1.2-trillion proven oil reserves – or 72 per cent of global supply.

“Accordingly, OPEC reserves are sufficient to cover almost 35 years of world oil demand,” notes Brackett.