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Page added on November 27, 2011

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New oil reserves pose threat to OPEC dominance

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While the world remained focused on Tahrir Square — another revolution of its kind has been in the making — impacting, changing and altering the global energy dynamics.

The issue of global energy security seems changing nexus now, resulting in uncertain call on Saudi and OPEC oil in medium term. Large new, conventional and unconventional reserves in North America, and elsewhere, are questioning the dominant role of OPEC in meeting the global oil thirst. These new developments have also sapped the urgency to develop the Kingdom’s own reserves — further — at this stage.

The transition has been in air for some time now — yet it has just been officially conceded — from the top. “The abundance of resources and the more ‘balanced’ geographical distribution of unconventionals have reduced the much-hyped concerns over ‘energy security’ which once served as the undercurrent driving energy policies and dominated the global energy debate,” Khalid Al-Falih, the Aramco CEO, said last week at the Energy Dialogue organized by the King Abdullah Petroleum Studies and Research Center.

With Riyadh’s supply cushion as the last defense against prices spiraling and getting out of hand, oil markets for years had kept a nervous eye on happenings in Saudi Arabia, getting edgy at the slightest pretext. “A few years ago, much of the global energy debate was based on the premise of acute resource scarcity and its economic and political ramifications,” Falih too underlined.

However, things appear radically changed today. “Rather than supply scarcity, oil supplies remain at comfortable levels, even given rising demand from fast-growing nations,” he added.

Consequently, the pressure on Riyadh to raise its output capacity had substantially reduced. “There was pressure on the kingdom and Saudi Aramco to raise production (capacity). That pressure, I think, has been substantially reduced,” Al-Falih said, admitting the debate on energy policy had been “turned upside down” recently by growing oil and natural gas supplies. In fact added with weak US economic data, mounting euro zone sovereign debt and concern about the exposure of major banks to it raised “the specter of a double-dip global recession,” he added.

And all this makes the demand security, so very essential for major investment in the sector, still more missing.  “All that makes spending on aggressive energy programs unlikely,” Al-Falih said, adding that abundant affordable hydrocarbon supplies challenged investment in renewable technologies.

As a result, Saudi Aramco had no plans to increase its oil production capacity to 15 million bpd. “Saudi Aramco has more spare capacity than the Kingdom is obligated to or has committed to,” he told reporters. “So it wouldn’t make sense.” In October too, Al-Falih had said that in view of altered circumstances, there was no need and reason for Aramco to significantly increase its oil production capacity in the mid-term.

Both conventional and conventional, new, resources have contributed to this altered scenario. Unconventional oil developments are dominated by oil sands in the United States and Canada with 2011 global production amounting to 2.3 million bpd or equivalent to production of non-OPEC member Norway. And in the meantime, rising conventional output from Brazil and Iraq are also contributing significantly to the emerging global energy landscape.

Tight oil is a form of light crude oil held in shale deep below the earth’s surface that is extracted with hydraulic fracturing, or “fracking,” using deep horizontal wells. OPEC expects global output of this non-conventional oil to rise 3.4 million bpd by 2015, still dominated by oil sands, to 5.8 million bpd by 2025 and to 8.4 million bpd by 2035 when tight oil would be playing a much bigger role.

In 2035, OPEC expects the United States and Canada to still be dominating unconventional oil production with 6.6 million bpd, but China could be producing 1.1 million bpd of its own unconventional oil by then.

OPEC estimated in a recent report that global reserves of tight oil could be as high as 300 billion barrels, well above current estimates of Saudi Arabia’s conventional reserves of around 265 billion barrels.

And shale gas too is supplementing the emerging picture. A technology-led surge in North American shale gas production has created a global gas glut over the last few years, reducing the US reliance on Middle Eastern gas imports, forcing exporters to look for new buyers and cut their revenues. Already the sparing natural gas production in the US has cut the share of oil consumption met by imports to 47 percent last year from 60 percent in 2005.

All this also carries immense connotations in geopolitical terms. It could change many equations. The US shale gas boom has virtually eliminated the need for US liquefied natural gas imports for at least two decades. And interestingly it has reduced Russia’s influence over the European natural gas market and diminished the petro-power of gas producers in the Middle East. According to a study by Rice University’s Baker Institute, “Shale Gas and US National Security,” US shale gas has substantially reduced Russia’s market share in Europe from 27 percent in 2009 to 13 percent by 2040, reducing the chances that Moscow can use energy as a tool for political gain.

Canada is one of the kingpins of this new resource wave in North America. The chairman of the Canadian Society for Unconventional Resources (CSUR) Dan Allan admits unconventional oil and gas are to have a major impact on the global scenario, “I don’t see any indication that the train is going to stop. Unconventional will become conventional and it will be the dominant force for the foreseeable future.”

Conceding the trend, even IEA, the OECD energy watchdog has downgraded its call estimates on Saudi and the OPEC oil. Earlier this month, the OECD energy watchdog in World Energy Outlook , it underlined that the kingdom would need to produce (only) 12.6m bpd by 2030, compared with an estimate for the same year of 18m bpd in 2005.

The agency now underlines that Iraq would be the biggest contributor to global oil supply growth between 2010 and 2035, adding more than 5m bpd. Saudi Arabia would still be the second largest contributor, but closely followed by global biofuel production, and oil supplies from Brazil, Canada and Kazakhstan (and indeed some others).

Good, old, uncle Cheney, the former US Vice president once said: “The problem is that the Good Lord didn’t see fit to put oil and gas reserves in places where there are more democratic governments.”

His prayers seem to have been answered — finally!

Arab News

4 Comments on "New oil reserves pose threat to OPEC dominance"

  1. MrEnergyCzar on Sun, 27th Nov 2011 3:16 am 

    The world won’t grow on unconventional oil because it won’t make up for the 3%-6% decline rates for conventional oil wells.


  2. Harquebus on Sun, 27th Nov 2011 4:47 am 

    The economy wasn’t designed for expensive energy.

  3. BillT on Sun, 27th Nov 2011 5:09 am 

    What a joke! The oil that is in the US is not going to even keep up with demand in the US, let alone replace anything we import. ALL oil that is left on the planet is expensive oil. Expensive in the amount of energy required to access it. EROEI. The oil supply is never going to grow again, it is going to shrink. No amount of dream articles will change that fact.

  4. FarQ3 on Sun, 27th Nov 2011 12:52 pm 

    ” much-hyped concerns over ‘energy security’ ”

    Oh yeah I get it, no reason to be concerned everybody lets just bury our heads in the sand and pretend that the US isn’t taking over the middle east, surrounding Iran as it’s next conquest and eliminating China’s access to foriegn oil as we speak. Lets all join in the Goldman induced trace chant ‘BAU, BAU, BAU, BAU, BAU ….’

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