In March, Citi published a report titled “North America, the New Middle East?”
The striking thing about the research is that not only is the global demand growth for oil slows amid a struggling economy in the developed world, but also that oil production in the North America has increased, and will be increasing, rather substantially in the coming decade.
The sources of new supply in the North America include oil sands, deepwater drilling, shale and tight oils, natural gas liquids (NGLs) and biofuel, according to Citi. Putting these together “. In total, North America as a whole could add over 11-m b/d of liquids from over 15-m b/d in 2010 to almost 27-m b/d by 2020-22.”
The potential increase in supply challenges the notion of “peak oil”, an idea that the world is running out of oil (to put it simply). As Citi wrote three months ago:
The increase in liquid growth, and the shale revolution in particular, is challenging the concept of peak oil. The belief that global oil production has peaked, or is on the cusp of doing so, has underpinned much of crude oil’s decade-long rally (setting aside the 2008 sell-off). The belief was bolstered by the repeated failure of supply to live up to the optimistic forecasts put forward by various governmental and international energy agencies. The International Energy Agency (IEA), the industry benchmark, made a habit of putting forth forecasts for the coming year of big gains in non-OPEC supply, only to spend the next 18 months revising those forecasts lower. But that pattern looks set to change, mainly because of the new shale oil and gas plays in the US, but also because of deepwater in the Gulf of Mexico, and Canadian oil sands. Production from these (and the associated liquids from shale gas plays) is rising so fast that total US oil production is surging, even as conventional oil production in Alaska and California is continuing its structural decline, and Gulf of Mexico production is now coming out of its post-Macondo (April 2010) drilling slump.
The pick-up in production growth in recent years and in the coming decade was driven by the fact that oil price has been so high for so long, that led to increase of research and development effort being put in looking for new sources of supply. Obviously, it is being paid off:
It has been higher prices in the last decade that, like higher prices in the 1970s, are leading to a resurgence in exploration and have unleashed three technological revolutions. US shale oil is one of them, but it has been preceded by the technological revolutions facilitating the tapping into vast hitherto non-commercial resources in deepwater and shale plays. Now the US is poised once again to become the largest liquid producer in the world and looks almost certain to overtake Russia and Saudi Arabia before the decade is over.
Thanks to the increase in exploration and investment into new technology, global oil discoveries started to surge, as the chart below illustrates:
Lately, we have got yet another research, this time from Harvard Kenny School Belfer Centre for Science and International Affairs, which is saying more or less the similar thing. Peak oil is nowhere near, and one of the biggest gainers in production capacity turns out to be, once again, the US.
In this paper, the author, Leonardo Maugeri noted:
After adjusting this substantial figure considering the risk factors affecting the actual accomplishment of the projects on a country-by-country basis, the additional production that could come by 2020 is about 29 mbd. Factoring in depletion rates of currently producing oilfields and their “reserve growth” (the estimated increases in crude oil, natural gas, and natural gas liquids that could be added to existing reserves through extension, revision, improved recovery efficiency, and the discovery of new pools or reservoirs), the net additional production capacity by 2020 could be 17.6 mbd, yielding a world oil production capacity of 110.6 mbd by that date – as shown in Figure 1. This would represent the most significant increase in any decade since the 1980s.
To my mind, this seems to be a particularly interesting moment for the world to discover that “no, we are not really running out of oil, and production will pick up.” The story for the last decade of increasing oil prices is that not only the supply growth seems to have stagnated in the previous decade, but also the growth in demand from emerging markets, particularly China, seemed to be insatiable.
But as we found out, the world is nowhere near peak oil, and the macro view here is that China will grow very very slowly as the investment driven model is being pushed to its limit, which should put an end to the rapid growth in oil demand from China. As Leonardo Maugeri wrote:
the worst scenario would involve a collapse of China, which would make any current forecast about the future of the oil market (and the world economy) useless. Being China the current engine of the world economy and of oil price consumption growth, its collapse would leave the oil price fall without a floor.
So, peak oil, where? And if demand will be slowing, where will oil price be headed to?
This article originally appeared here: Peak Oil? Where?
Also sprach Analyst – World & China Economy, Global Finance, Real Estate
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