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Oil Industry Says Investment Vital to Supply, Despite Shale Boom

Date : 11/20/2012 @ 12:33AM
Source : Dow Jones News
Stock : Statoil Asa (STO)
Quote : 23.6  0.0 (0.00%) @ 3:05PM
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Oil Industry Says Investment Vital to Supply, Despite Shale Boom

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By Kjetil Malkenes Hovland and Sarah Kent

Continued investment in new and existing oil projects will be essential to ensure the world remains adequately supplied, despite the oil boom under way in the United States, industry experts said Monday.

The U.S. is experiencing a surge in oil production as a result of the faster-than-expected development of hydrocarbon resources locked in shale and other tight rock formations in the country. The shale oil boom is expected to transform energy supply in the coming years.

This surge and other new sources of production have largely displaced the belief, widely held a few years ago, that the world was entering a period of "peak oil"--a scenario in which global oil supply was seen to have reached its limit, pushing up prices and putting strain on industry.

Instead, the supply picture appears to look increasingly comfortable in the coming years.

In its closely-watched World Energy Outlook published earlier this month, the International Energy Agency, or IEA, joined other forecasters such as the Organization of the Petroleum Exporting Countries and the U.S. Energy Information Administration in predicting a sharp rise in U.S. oil production in the coming years, going so far as to predict that the United States could become the world's largest oil producer within the next 10 years. It also predicted significant growth in production from Iraq in the period to 2035.

But the Paris-based IEA, which represents energy-consuming nations, also said global oil demand was expected to rise by more than 10 million barrels a day over the next 20 years to reach 99.7 million barrels a day by 2035.

"If the [IEA] estimates for U.S. production are not met," that "could trigger the possibility of oil shortages and higher prices" as producers could have cut their investment based on these forecasts, OPEC Secretary General Abdalla Salem el-Badri said in an interview last week.

Hurdles exist that could stand in the way of current production forecasts. In the U.S., policy decisions on the environmental impact of the technologies used in extracting shale oil could hamper projects, while political instability and the need for substantial infrastructure investment pose significant risks to the outlook in Iraq, industry experts said Monday.

The uncertainties make it difficult to predict how production will develop in the coming year, let alone over the next two decades.

"People are looking at a more comfortable supply situation [in 2013], but that may be slightly blinkered because just focusing on the undoubted resilience in North America ignores the fact that non-OPEC supply has struggled a bit this year," said David Fyfe, head of market research and analysis at Gunvor Group, a role he previously held at the International Energy Agency.

Booming production of unconventional oil will not be enough on its own to provide adequate supply, said Helge Lund, chief executive of Norwegian oil company Statoil ASA.

"I think unconventionals are very, very important, but I think decline is underestimated when discussing the balance between supply and demand," Mr. Lund said.

Production at many of the world's existing and older oil fields is falling and will need to be replaced in order to maintain levels of supply.

The Norwegian continental shelf, where Statoil still has the bulk of its production, is a good example. Since Norway's crude oil production hit a peak in 2000 at 3.12 million barrels per day, it's been nearly halved to 1.68 million barrels per day in 2011.

"Norway has been quite good at achieving a high recovery rate. So you can almost assume that the decline is stronger and the recovery rate smaller elsewhere," said Mr. Lund.

"There's a risk people get very complacent about supply," said Gunvor's Mr. Fyfe. "The real struggle is with mature resources."

But Richard Newell, former head of the U.S. Energy Information Administration, or EIA, said oil prices wouldn't need to be much higher than the current range of around $100-$120 a barrel in order to sustain enough investment to ensure oil supply matches global demand in the future.

"There are a lot of barrels of oil that could be profitably developed at $120-something a barrel," Mr. Newell said, speaking Monday on the sidelines of a conference in Norway, though he added that price stability would also be important in ensuring investment.

"Oil prices which vary between $80 per barrel and $140 per barrel make it more challenging," he said.

The price of the European benchmark Brent crude oil futures contract for January jumped above $111 a barrel Monday.

Mr. Newell was administrator of the EIA from 2009 to 2011 and has served on the President's Council of Economic Advisers. He is now director of the Duke University Energy Initiative.

Write to Kjetil Malkenes Hovland at KjetilMalkenes.Hovland@dowjones.com and Sarah Kent at sarah.kent@dowjones.com

(Benoit Faucon in London contributed to this report.)

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