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A World Awash in Oil & Gas

October 24, 2012

Some cut & pastes with bold added from:  Maugeri, Leonardo. “Oil: The Next Revolution” Discussion Paper 2012-10, Belfer Center for Science and International Affairs, Harvard Kennedy School, June 2012.

From the Executive Summary:

Contrary to what most people believe, oil supply capacity is growing worldwide at such an
unprecedented level that it might outpace consumption. This could lead to a glut of
overproduction and a steep dip in oil prices.

Based on original, bottom-up, field-by-field analysis of most oil exploration and development
projects in the world, this paper suggests that an unrestricted, additional production (the level of production targeted by each single project, according to its schedule, unadjusted for risk) of more than 49 million barrels per day of oil (crude oil and natural gas liquids, or NGLs) is targeted for 2020, the equivalent of more than half the current world production capacity of 93 mbd.

…This oil revival is spurred by an unparalleled investment cycle that started in 2003 and has reached its climax from 2010 on, with three-year investments in oil and gas exploration and production of more than $1.5 trillion (2012 data are estimates).

…As shown in Figure 2, in the aggregate, production capacity growth will occur almost everywhere, bringing about also a “de-conventionalization” of oil supplies.

…The U.S. shale/tight oil could be a paradigm-shifter for the oil world, because it could alter its features by allowing not only for the development of the world’s still virgin shale/tight oil formations, but also for recovering more oil from conventional, established oilfields – whose average recovery rate is currently no higher than 35 percent.

…The natural endowment of the initial American shale play, Bakken/Three Forks (a tight oil formation) in North Dakota and Montana, could become a big Persian Gulf producing country within the United States. But the country has more than twenty big shale oil formations, especially the Eagle Ford Shale, where the recent boom is revealing a hydrocarbon endowment comparable to that of the Bakken Shale.

…The principal difficulty concerning shale gas is the effect of hydraulic fracturing on the environment, which is perceived as contributing to water and land contamination, natural gas infiltration into fresh water aquifers, poisoning of the subsoil because of the intensive use of chemicals, and even minor earthquakes. Even if those problems cannot be eliminated, after more than one million hydraulic fracturing operations in the United States since 1947 (hydraulic fracturing is not a new technology), the evidence shows that only a tiny percentage of these accidents occurred, and that they can be managed with appropriate best practices and adequate enforcement, rather than by over-regulating the activity.

Whatever the future, the analysis reported in this paper reveals some important points:
• Oil is not in short supply. From a purely physical point of view, there are huge volumes of conventional and unconventional oils still to be developed, with no “peak-oil” in sight. The real problems concerning future oil production are above the surface, not beneath it, and relate to political decisions and geopolitical instability.
• Other things equal, any significant setback to additional production in Iraq, the United States, and Canada would have a strong impact on the global oil market, considering the contribution of these countries to the future growth of oil supply.
• The shale/tight oil boom in the United States is not a temporary bubble, but the most important revolution in the oil sector in decades. It will probably trigger worldwide emulation over the next decades that might bear surprising results – given the fact that most shale/tight oil resources in the world are still unknown and untapped. What’s more, the application of shale extraction key-technologies (horizontal drilling and hydraulic fracturing) to conventional oilfield could dramatically increase world’s oil production.
• In the aggregate, conventional oil production is also growing throughout the world at an unexpected rate, although some areas of the world (Canada, the United States, the North Sea) are witnessing an apparently irreversible decline of the conventional production.
• The age of “cheap oil” is probably behind us, but it is still uncertain what the future level of oil prices might be. Technology may turn today’s expensive oil into tomorrow’s cheap oil.

• The oil market will remain highly volatile until 2015 and prone to extreme movements in opposite directions, thus representing a major challenge for investors, in spite of its short and long term opportunities. After 2015, however, most of the projects considered in this paper will advance significantly and contribute to a strong build-up of the world’s production capacity. This could provoke a major phenomenon of overproduction and lead to a significant, stable dip of oil prices, unless oil demand were to grow at a sustained yearly rate of at least 1.6 percent for the entire decade

• 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. 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.
• Some of the major geopolitical consequences of the oil revolution include Asia becoming the reference market for the bulk of the Middle East oil, and China becoming a new protagonist in the political affairs of the whole region.
• At the same time, the Western Hemisphere could return to a pre-World War II status of theoretical oil self-sufficiency, and the United States could dramatically reduce its oil import needs.
• However, quasi oil self-sufficiency will neither insulate the United States from the rest of the global oil market (and world oil prices), nor diminish the critical importance of the Middle East to its foreign policy. At the same time, countries such as Canada, Venezuela and Brazil may decide to export their oil and gas production to markets other than the U.S. for purely commercial reasons, making the notion of Western Hemisphere self-sufficiency irrelevant.
• It’s also true, however, that over the next decades, the growing role of unconventional oils will make the Western hemisphere the new center of gravity of oil exploration and production.

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