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Sector Profiles

Oil and Gas Industry


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Major Industry Trends

Oil

Brent oil averaged around US$111.26 per barrel in 2011, an increase of 40% from the 2010 level. The loss of Libyan supplies early in the year, combined with smaller disruptions in a number of other countries, pushed prices sharply higher despite a large increase in production among other OPEC members following the Libyan outages, and a release of strategic stocks from International Energy Agency (IEA) member countries.

Crude oil prices rose during the first quarter of 2012 as concerns about possible international supply disruptions pushed up petroleum prices. Prices then fell during the second quarter, before turning sharply upward at the start of the third quarter. They remained at these relatively elevated levels during the final quarter of the year.

The development of shale oil resources in the United States holds the potential to transform the global oil and gas industry. The US Energy Information Administration (EIA) said in early 2013 that US oil production would jump by a quarter by 2014, to its highest level in 26 years. This is mainly because of the discovery of vast reserves of shale oil. New technology, colloquially known as fracking, has allowed the United States to access oil and gas in shale rock. Fracking is the process of blasting water at high pressure into shale rock to release oil or gas held within it. It has become widespread in the United States and domestic gas prices have plummeted as a result.

The technology is also now having an impact on the US oil industry. The EIA, for example, forecast average global oil prices would fall from US$112 per barrel in 2012, to US$99 in 2014. It added that US oil imports would fall by a quarter between 2012 and 2014, because of rising domestic production and the discovery of shale gas. US oil imports have been falling since 2005, when they stood at 12.5 million barrels per day (bpd). By 2014, imports are expected to have halved to six million barrels, the EIA said.

Domestic oil production, which stood at 6.4 million barrels in 2012, is forecast to rise to 7.9 million barrels in 2013, the highest level since 1988. Meanwhile, the IEA has said it expects the United States to overtake Russia as the world’s biggest gas producer by 2015, and to become “all but self-sufficient” in its energy needs by about 2035.

The United States will also overtake Saudi Arabia as the world’s biggest oil producer “by around 2020,” the IEA predicted at the end of 2012 in World Energy Outlook. It expects that the US will be producing 11.1 million bpd by 2020, compared with 10.6 million from Saudi Arabia. Currently, the US imports about 20% of its total energy needs.

Gas

The IEA also expects the United States to overtake Russia as the world’s biggest gas producer by 2015, again thanks to fracking. In December 2012, Royal Dutch Shell’s chief executive, Peter Voser, said the US economy is set for a revolution as the country becomes self-sufficient in energy. He and other experts have argued that the an abundance of low-cost energy will drive the re-industrialization of the economy. Nonetheless, the shale revolution is not without its critics. Environmentalists fear it could increase seismic risks and pollute drinking water. However, US officials question these concerns, and say that thanks to the higher proportion of gas use, the United States has had its lowest CO2 emissions in 20 years.

Interest in exploiting shale gas reserves is spreading across the globe. In early 2013, Shell signed a US$10 billion shale gas deal with Ukraine—the biggest contract yet in Europe—which could help Ukraine ease its reliance on Russian gas imports. Ukraine is said to have Europe’s third-largest shale gas reserves at 42 trillion ft3 (1.2 trillion m3), according to the EIA. Its reserves are dwarfed by those of France, however, which are estimated to be Europe’s largest at 180 trillion ft3. However, France has banned fracking. By contrast, the German government of Chancellor Angela Merkel wants to jump-start the extraction of shale gas deposits in the country, essentially ending a hold on the practice because of public concern and safety worries. Legal guidelines for fracking are to be introduced before the German general election in Fall 2013.

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Market Analysis

Oil

Global oil reserves rose by 31 billion barrels to 1,653 billion barrels in 2011, according to BP. Iraq added 28 billion bbl and Russia, Brazil, and Saudi Arabia all increased reserves by 1 billion bbl. Proved reserves remain concentrated in OPEC, which controls 72% of the world’s oil reserves, the highest proportion since 1998. Overall, the long-term trend is that globally reserves are increasing in proportion to the amount being used. Global proved oil reserves at the end of 2011 reached 1652.6 billion bbl, sufficient to meet 54.2 years of global production.

Annual global oil production in 2011 increased by 1.1 million bpd, or 1.3%. Nearly all the net growth was in OPEC, with large increases in Saudi Arabia, the UAE, Kuwait, and Iraq more than offsetting the loss of the Libyan supply. Output reached record levels in Saudi Arabia, the UAE, and Qatar. Non-OPEC output was broadly flat, with increases in the United States, Canada, Russia, and Colombia offsetting continued declines in mature provinces such as the United Kingdom and Norway, as well as unexpected outages in a number of other countries.

Gas

Global natural gas reserves increased by 12.3 trillion m3 to 208.4 trillion m3 in 2011, according to BP. Meanwhile, global natural gas production grew by 3.1%. The United States recorded the largest volumetric increase despite lower gas prices, and remained the world’s largest producer. Consumption growth was below average in all regions except North America, where low prices drove robust growth. Outside North America, the largest volumetric gains in consumption were in China, Saudi Arabia, and Japan These increases were partly offset by the largest decline on record in EU gas consumption.

Analysts expect global gas demand to grow rapidly over the coming decades. The key drivers of this growth are likely to be:

  • Aggressive gas usage plans in China and India;

  • The emergence of domestic shale gas as a preferred fuel source in the United States;

  • The discovery and utilization of gas resources in Latin America;

  • The move away from nuclear power in Japan and some European countries in response to the Fukushima Dai-ichi nuclear accident;

  • Europe’s continued reduction of greenhouse gas emissions;

  • Russian plans to search for gas in its Far Eastern region;

  • The search for shale and other unconventional gas resources in currently gas-poor countries.

Shell, for example, expects global natural gas demand to increase by 60% from 2010 to 2030, reaching 25% of the global primary energy mix, and, within that, strong growth in liquefied natural gas (LNG). According to Shell, LNG demand doubled to 200 million tonnes per annum (mtpa) in the first decade of this century. Shell expects LNG demand to double again to 400 mtpa by 2020, and potentially reach 500 mtpa by 2025. Meeting this demand growth will require substantial industry investment—potentially more than US$700 billion—and continued innovation and interdependency between supplier and customer countries.

The IEA’s view is more conservative, saying that demand for natural gas could rise more than 50% by 2035, from 2010. However, this growth would depend upon whether a significant portion of the vast global resources of shale gas, tight gas and coal-bed methane could be developed profitably, and in an environmentally acceptable way. The IEA said the surge in North American production of unconventional gas, thanks to technology advances, held out the prospect of further output increases in the United States and Canada, and “the emergence of a large-scale unconventional gas industry in other parts of the world, where sizeable resources are known to exist.” This would help bring about greater energy diversity, boost energy security, and also result in global benefits in the form of reduced energy costs, it said. Gas could have a 25% share of the global energy mix by 2035, overtaking coal to become the second-largest primary energy source after oil, in the IEA’s most positive scenario for unconventional gas.

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Further reading on the Oil and Gas industry

Article:

  • Der Spiegel. “Full throttle ahead: US tips global power scales with fracking.” February 1, 2013. Online at: tinyurl.com/ang2hfo

Reports:

  • BP. “Statistical review of world energy.” June 2012. Online at: tinyurl.com/q7h9qn4
  • Organization of Petroleum Exporting Countries. “Monthly oil market report.” December 2012. Online at: tinyurl.com/nknoa39 [PDF].
  • PricewaterhouseCoopers. “Shale gas: A renaissance in US manufacturing?” February 2012. Online at: tinyurl.com/8ze7pr6

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