Peak shale

Ready or not, OPEC will get back the petro-power crown

June 3, 2014
Obsession
Energy Shocks
June 3, 2014

The US has taken the economic offensive on the back of its recent shale oil and gas boom, but that bonanza will dwindle in the 2020s, leaving it again subject to Persian Gulf oil producers, a leading global energy agency said today. The question is whether the Gulf states will be ready to take back the mantle.

For the last few years, the US has undergone an identity makeover, with its experts crowing that, contrary to the national decline forecast by so many, it was beginning an industrial revival and achieving a measure of “energy independence.” Four decades after the Arab oil embargo shook the foundations of global power in 1973, the US might even withdraw its expensive security umbrella from the Persian Gulf petro-states, it has been suggested.

The shift in national confidence has been spurred by shale fever. Over the last four or five years, shale gas supplies (extracted via the drilling technique known as fracking) have brought the US from shortage to surplus in the fuel. As recently as last year, the US was often importing more than 10 million barrels of oil a day, but with the shale oil boom, daily imports dropped (paywall) last month to 6.5 million barrels, a 17-year low. Just last week, an industry-funded report advocated opening up the US for oil exports, all but banned since the 1970s.

But the US party may last only another decade, give or take a few years, according to the Paris-based International Energy Agency (IEA). The surge in oil production from North America will plateau around 2020 and begin to decline in the middle of the decade, the IEA said in a report issued in London. The Organization of the Petroleum Exporting Countries (OPEC), which possesses by far the majority of the world’s remaining oil reserves, will have to pick up the slack, the IEA said.

The IEA issued this same prediction of peak shale last year. But today the agency added a stark additional note to the warning: that Persian Gulf producers are not investing the scale of long-term capital necessary to meet future global demand. IEA chief economist Fatih Birol estimates that the Gulf countries should invest (paywall) $90 billion a year through 2025 to be ready. Instead, they spend much of their $800 billion in annual oil revenue on new energy subsidies and other social programs to which they have committed since the 2011 Arab Spring.

Meanwhile, the chart below shows a disproportionate amount of global oil investment continuing to pour into North American “tight” oil from shale. This isn’t so surprising: Oil is a business for optimists. Drillers have to be, to operate in such a volatile industry. So even though the peak is staring everyone in the face, the investment goes on furiously, with a faith that somehow everything will be all right. (The most stubborn bulls maintain that the oil industry will pull a new technological rabbit out of its hat and extend shale’s run.) Either that, or investors are just trying to squeeze out every last dime before the bounty is tapped.

Disproportionate investment is going into shale gas and oil rather than Persian Gulf fields where it is needed

Between now and 2035, oil and gas companies will spend (pdf) more than $850 billion a year on exploration and production, around 80% of it just to maintain operations at currently producing fields, the IEA says. About a quarter of the total will go to shale.

And the 20% remaining—what’s left for new exploration and production—may not be enough to offset the coming shortfall. If and when that shortfall happens, global oil prices would rise about $15 a barrel by 2025, the IEA says. And in a truly tight market, that estimate could be low.

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