After witnessing the impact that the U.S. shale boom has had worldwide, PwC decided to examine how the development of shale oil worldwide might impact oil prices and the economy worldwide, said Adam Lyons, director of PwC and co-author of PwC’s global report, “Shale Oil – the Next Energy Revolution”.
“Shale oil is on the same journey as shale gas,” said Lyons, who discussed the study’s findings at a World Affairs Council event on the global potential of shale oil in Houston May 1. Lyons and Scott Tinker, state geologist for Texas, and acting associate dean of research at the University of Texas at Austin’s Jackson School of Geosciences, spoke on the global outlook for shale hosted by PwC and the World Affairs Council.
Global shale oil production could grow to 14 million barrels of oil per day by 2035, which would comprise 12 percent of the world’s total oil supply, according to PwC. As a result, PwC estimates oil prices in 2035 could be reduced by 25 to 40 percent, or $83 to $100/barrel in real terms, compared to the U.S. Energy Information Administration’s current baseline projection of $133/barrel in 2035, which assumes a low level of shale production.
“In turn, we estimate this could increase the level of global gross domestic product (GDP) in 2035 by around 2.3 percent to 3.7 percent, or approximately $1.7 to $2.7 trillion at present global GDP values,” PwC noted in its report.
Larger net oil importers such as Japan and India could see their GDP boosted by 4 to 7 percent by 2035, while the United States, China, the Eurozone and the UK might see GDP gains of 2 to 5 percent. However, Russia and countries to the Middle East could see their trade balances worsen by around 4 to 10 percent of GDP in the long run if they do not develop their shale resources.
Recent forecasts by the U.S. Energy Information Administration (EIA) and the International Energy Agency (IEA) both forecast a marked risk oil global oil production and real oil prices through 2035, due largely to rising demand from China, India and other fast-growing emergency economies, PwC noted. EIA and IEA anticipate respective increases in global oil production by 2035 of 19 percent and 28 percent and average global oil price predictions of $133 per barrel and $127 per barrel.
However, PwC believes these projections are conservative as they are based only on resources with a high degree of certainty.
“Past experience of shale oil and shale gas suggests that these resource estimates are likely to be revised upwards significantly over time as activity to new plays in the United States and globally,” PwC noted in the report.
PwC’s model for the study was built on two scenarios regarding global shale oil: if the Organization of Petroleum Exporting Countries (OPEC) continued to control oil prices and if OPEC’s influence over oil prices waned, said Lyons. While the effects of oil prices on the global economy are not as great as those seen in the 1970s, when oil price hikes had negative severe impacts on major oil-importing economies, they remain significant.
The study highlights the opportunities and challenges which governments worldwide and oil companies face with great shale oil production. Governments will have to determine how to balance the benefits of shale oil production with potentially conflicting objective such as energy affordability and decarbonization. Governments in OPEC nations and other major net oil exports will also need to assess the impact of shale oil on global oil prices and their revenues, budgets and economies.
Additionally, oil companies will need to assess their current portfolios and planned projects against lower price scenarios. Companies also need to review their business models and skills in light of the industrialized production process of shale oil, which makes very different demands of operators than today’s remote and challenging locations.
Potential Seen Globally for Shale Oil Development
Shale oil production in the Eagle Ford and Bakken plays has played a significant role in reversing the decline in U.S. oil production. The U.S. shale revolution has not only changed the U.S. economy and global economy, but how the industry thinks about the flow of oil and gas production. Unconventional oil and gas flows differently from conventional and can’t be explained by Darcy’s Law, meaning the industry must think of a new way to describe unconventional oil and gas flow, said Tinker.
While the shale oil and gas revolution has transformed the U.S. energy landscape, the question remains as to the timing and pace of shale resource development internationally. PwC noted in its global report that it sees indications that potentially large shale oil resources exist worldwide. Global shale oil resources are estimated at between 330 billion and 1,465 billion barrels, and investment is underway to define these resources. Since early 2012, a number of shale oil discoveries have been made, and a number of government initiatives to encourage the exploration and production of shale oil.
Despite shale oil’s global potential, environmental fears have prompted some European countries to place moratoriums on hydraulic fracturing. Germany, one of the cleanest thinking and acting countries worldwide, has limited potential for renewable energy.
“The solar intensity over Germany is that of Seattle,” noted Tinker.
Despite its renewable energy limits, Germany responded to public pressure to ban hydraulic fracturing.
Germany is now burning more coal to meet its energy demand, Tinker noted. One unintended consequence of the U.S. shale boom is that more U.S. energy consumption is being met with natural gas instead of coal. That coal is being exported to Europe. As a result, Europe has increased its consumption of U.S. coal, which is mostly the brown dirt variety found in Texas. The increase in coal consumption has boosted carbon emissions in Europe over the past year.
Some analysts have questioned shale’s viability, even in the United States. In the Barnett shale, drilling results have varied by the tier within the play. Some companies have made money, some have lost money. But this trend in shale is not unique to the oil and business.
“Shale plays are like kids,” Tinker commented. “They all come from the same gene pool, but they behave differently and each has their own sets of challenges.”
Besides the challenge of mineralogy, above ground challenges such as lack of landowner incentives and population density pose challenges to shale oil development in Europe. Other countries such as Australia face different challenges such as water issues. The United States represents a unique crucible of factors in terms of technology, worker skills, regulations and landowner incentives that don’t exist elsewhere, Lyons noted.
Lyons sees a state intervention model for shale oil development in countries such as China, which can implement shale development plans from the national government level. China will definitely produce shale gas, and while oil and gas producers are not making money right now off China’s shale plays, they will see profits in the future, Tinker noted.
“Chinese companies are involved in shale plays around the world, learning the technology, and there are plenty of good shale basins in China.”
Russia and the Middle East also have plenty of quality shale gas. However, these countries are not yet ready to develop their shale, which is more expensive, and are seeking to bring their conventional oil and gas resources to market. Tinker noted that anti-fracking propaganda overseas can be traced to Russia and to Middle Eastern countries such as the United Arab Emirates, which are seeking to squash shale exploration elsewhere that could eliminate demand for Russian and Middle Eastern conventional natural gas.
Although there’s interest in shale oil exploration worldwide, the noise associated with shale activity is lower than noise seen in the United States, Lyons said. Many companies are reluctant to discuss this interest after seeing opposition to shale exploration in the United States.
Global offshore exploration and production will continue to play a critical role in meeting future energy demand. However, offshore oil and gas projects will start to compete with onshore unconventional plays for capital and talent, Lyons noted.
Resistance to Shale Exploration
Tinker attributes three factors to resistance to hydraulic fracturing – lack of education, lack of willingness by opponents to examine realistic energy choices, and politics.
“Some folks just don’t like us,” said Tinker, noting that the industry is partly to blame. In countries outside the United States and Western Europe, the oil and gas industry is viewed more favorably, Tinker added.
While the hydraulic fracturing process is effective at cracking a 500-foot slab of rock, the equivalent of a 50-story building, the laws of physics do not allow it to crack another 5 to 10 50-story sections of rock beneath the initial level, said Tinker of fears over hydraulic fracturing causing earthquakes. However, increased oil and gas activity does mean contamination of water can occur if a truck accident happens.
The industry can seek ways to minimize the impact of shale exploration on local environments, and even make more money, through efforts such as monitoring methane leaks and better disposal methods for drilling fluids. Oil and gas companies can also look for alternatives to fresh water for use in hydraulic fracturing, such as ocean water or dry fracs.
“All you’re doing is creating surface areas [with hydraulic fracturing],” Tinker commented. “There are lots of ways to do that.”
The oil and gas industry can also be more open with the public about what it’s doing.
“It’s better to come out of the corners and make some compromises,” Tinker commented, pointing to Colorado Gov. John Hickenlooper as an example of compromise.
Tinker noted that Hickenlooper calls himself a bad Democrat because he’s both pro-environmental and pro-oil and gas industry.
The United States could easily achieve energy independence, but Tinker questions whether energy independence for the United States is a great idea. Instead, energy security is a better goal for the United States, Tinker said, who believes the United States should pursue a combination of incentives and free market to achieve affordable, reliable and environmentally sustainable energy.
*Karen Boman has more than 10 years of experience covering the upstream oil and gas sector. Email Karen at [email protected]