Strong demand for Gulf oil production capacity is expected to be tempered by a rising share of world oil and gas production from unconventional reserves, according to a recent paper by the Abu Dhabi-based Emirates Centre for Strategic Studies and Research.
This is in addition to new conversion resources such as gas and coal to liquids, alternative energy and electrified vehicles.
“The market in 2030 or 2040, rather than centreing around a peak in conventional oil, might look exactly as it does today consisting of managed output from Opec resources and a growing proportion of production from unconventional plays such as shale gas, oil shale, ultra deep water and oil sands”, says the paper, titled The status of world oil resources and implications for the Gulf.
The pace of change in the natural gas market over the past few decades is instructive of what might be in store for the oil market.
Onshore drilling in the US since the 1990s has produced something no one expected, an enormous surplus of natural gas. It is already having ramifications for the structure of the global gas market. Middle East producers, anticipating a rise in demand for liquefied natural gas (LNG) from the US and Mexico, invested heavily in expanding export capacity. But producers such as Qatar have been forced to look for new markets for its LNG, and at lower prices in the face of competition from shale gas supplies.
While US natural gas demand is forecast to rise by over 40 per cent by 2040, rising shale gas production means demand for Middle East LNG will be contained and gas prices could remain stable in the $4-6 a million BTU range for the next two decades, having peaked at more than $14 a million BTU in 2008.
Could the same trend happen in the oil markets? It is easy to see parallels if high prices stimulate massive investments in unconventional oil resources in the US.
Middle East producers may find themselves facing increasing competition for market share with unconventional supplies at “prices driven by technological innovation rather than depletion curves”.
Canadian oil sands production currently averages 1.2 million barrels a day (b/d) and is projected to rise to 2.2 million b/d by 2015 and 4.2 million b/d by 2030. US unconventional oil production will take an increasing share of domestic output by 2040, reaching 1.2 million b/d by 2040 and 7.3 million b/d by 2050 as oil prices move higher.
At the same time, the kind of price spikes seen in 2008 and 2011 with oil prices at more than $100 a barrel encourage oil consuming countries to adopt energy efficiency measures to curb long-term growth. Low global gas prices, may take a substantial share from oil in power generation and the industrial sectors. That is just one possible question of many which could affect demand.
Most forecasts of future supply and demand anticipate a rise in the call on oil from the Middle East. But it is difficult to predict how new supplies from the region, including the massive increase planned in Iraq, will compare to demand.
As rising oil prices promote fuel substitution and encourage the production of unconventional resources, projections that an additional 10 to 25 million b/d will be required from the Gulf region look overly bullish.
“All of those trend lines seem to be in play at this juncture of $70 to $100 a barrel,” says the report.
The authors challenge the presumption that the depletion of conventional proven oil reserves means major Gulf producers need to hoard resources to preserve higher returns for future generations.
“Instead Gulf producers need to consider a wide range of dynamic factors that will be unleashed under differing price scenarios”.
They suggest instead of looking at depletion of traditional resources, national oil companies should consider the relative price of oil, compared to competing energy sources and how differing prices affect innovation and investment in substitutes.