Become a member today. It's free.
We will not release or resell your information to third-parties without your permission.
GUY CHAZAN AND ED CROOKS
Monday, Nov. 12 2012, 8:44 AM EST
The U.S. will overtake Saudi Arabia and Russia to become the world’s largest global oil producer by 2017, according to the International Energy Agency, in one of the clearest signs yet of how the shale revolution is redrawing the global energy landscape.
This marks the first time the IEA, the developed world’s most respected energy forecaster, has made such a prediction. It underscores how the drilling boom that has unlocked North America’s vast reserves of hard-to-get-at oil and gas is changing the world’s oil balance.
However, other analysts have warned that the U.S. oil boom is still in its infancy, and continued growth to the levels predicted by the IEA cannot be guaranteed.
In its yearly world energy outlook, published on Monday, the IEA said that by 2030 “the U.S., which currently imports around 20 per cent of its total energy needs, becomes all but self-sufficient in net terms – a dramatic reversal of the trend seen in most other energy-importing countries”. It said that partly as a result of this, the direction of the international oil trade would pivot towards Asia.
If realized, the IEA’s prediction would have significant implications for world commodity markets and the broader geopolitics of energy. Some analysts have wondered whether a US that was energy independent would still guard the world’s critical sea lanes and supply routes in two decades’ time – and if it withdrew from such a role, whether China, whose reliance on Middle East crude imports was growing, would replace it.
The increase in U.S. domestic production – of biofuels such as ethanol as well as unconventional “tight” oil – comes as new fuel-efficiency measures in transport imposed by the first Obama administration are set to reduce oil demand sharply. That will lead to a big fall in oil imports into the US, which the IEA says will plunge from 10m barrels a day to 4m b/d in 10 years’ time. The agency says that North America will become a net oil exporter by about 2035.
“The US, which imported a substantial chunk of oil from the Middle East, will be importing almost nothing from there in a few years’ time,” Fatih Birol, the IEA’s chief economist, told the Financial Times. “That will have implications for oil markets and beyond.”
The fall in imports would have significant positive spin-offs for the U.S. current account deficit. Economists at HSBC say a 25 per cent decline in oil shipments to the U.S. by 2020 could reduce the country’s import bill by about $85-billion, nearly 20 per cent of the 2011 deficit of $466-billion.
However, those projections are based on an extrapolation of the dramatic growth in shale oil production in recent years, which some analysts see as implausible, or at least uncertain.
The key to the new U.S. oil boom is the widespread use of techniques such as hydraulic fracturing, or fracking, and horizontal drilling that have tapped huge hydrocarbon resources previously thought unrecoverable. The boom started in natural gas, but has in recent years switched to oil, produced in ever larger quantities in places such as North Dakota’s Bakken Shale and Eagle Ford in South Texas.
The decline rate of shale oil wells is very steep, however. A year after coming on stream, production has dropped to about 20-40 per cent of its original level, according to analysts at Barclays Capital. That means producers have to keep drilling to sustain output, and there is still uncertainty about how much new wells will produce. The best prospects will have been developed first, meaning that subsequent drilling will take place in less favourable geology. It will take years to show how serious that deterioration is.
Other challenges facing the industry include the prospect of curbs on the use of water, essential for fracking, and other new regulations from the U.S. Environmental Protection Agency and other federal government bodies.
The U.S. pipeline network is also inadequate to carry oil to market from the new fields being opened up, and will require heavy investment.
So far, however, U.S. domestic oil production is rising steadily, after decades of decline. The U.S. is now adding more oil and gas production than any other country in the world: during the past five years it has raised total supply by 2.59m b/d, an average growth rate of 500,000 b/d a year.
The U.S. Energy Information Administration expects production will rise from 6.3m b/d this year to 6.8m b/d in 2013 – its highest level since 1993. The EIA predicts it to be as high as 7.8m b/d in 2035. Combined with biofuels and natural gas liquids such as ethane and butane, that will mean the U.S. will soon be producing more than Saudi Arabia, which has been pumping just under 10m b/d in recent months, and Russia, which produces about the same amount.
But the IEA warned that reducing its oil imports would not insulate the U.S. from developments in international markets and remove its vulnerability to price spikes. The agency said no country was an “energy island.”
In its outlook, the IEA said global energy demand would grow by more than a third over the period to 2035, with China, India and the Middle East accounting for 60 per cent of the increase. In contrast, energy demand would “barely rise” in the leading industrialized countries. Global oil demand would reach 99.7m b/d in 2035, up from 87.4m b/d in 2011.
The agency also unveiled much lower projections for growth in nuclear power compared with last year’s outlook, a reflection of the broad retreat from nuclear in the wake of last year’s Fukushima disaster. Japan and France recently said they wanted to cut their dependence on nuclear power, and its competitiveness as an energy source in the US and Canada has been challenged by cheap natural gas.