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IEA: The Shale Mirage – Future Crude Oil Provide Crunch

A lot of buyers have subscribed to the speculation that we are entering a brand new era of global power abundance, led by technological advances in horizontal drilling and hydraulic fracturing. The domestic price of natural gasoline in the U.S. has plummeted, and crude oil production has elevated to the degree that domestic production in October exceeded imported crude oil for the primary time in 18 years.

Tank liquid distributorSo it was stunning that probably the most fascinating message within the Worldwide Vitality Agency’s (IEA) annual World Power Outlook — considered the gold commonplace of energy analysis — was additionally probably the most disturbing for those who subscribe to the abundance principle: expertise and higher costs have opened up new resources but the IEA is worried that the world may face a ‘future oil supply crunch’ as shale development matures.

IEA Chief Economist Fatih Birol noted the positive progress in oil provide documented in the IEA report, but added “this doesn’t mean the world is on the verge of an era of oil abundance”.

All Liquids Will not be Equal
The bp oil refinery uk IEA report famous that whole world oil production (together with natural gasoline liquids (NGL’s)) in 2012 was 87.1 million barrels per day, an increase of 11.9 million barrels per day since 2000. However they famous that greater than two-thirds of the increased provide was excessive-cost unconventional oil (tight oil, oil sands, deep-water oil) or natural gasoline liquids.

This distinction is vital for two reasons. First, unconventional supplies usually have a lot larger break-even costs than typical reserves. Discovering and improvement costs from new reserves in unconventional shale plays run from $50 to over $eighty per barrel. In 2000 standard oil reserves were being added within the $10 to $30 per barrel range. Any sustained drop in global oil prices will shortly delay exploration efforts in high-price prospects.

Second, pure gasoline liquids have a much lower power density than crude oil. A barrel of NGL, power sensible, just isn’t equal to a barrel of standard crude oil. The heating content material of NGL’s is mostly round 60-70% that of crude oil, and the sharp improve in U.S. liquids manufacturing from the Bakken, Eagle Ford, and Marcellus shales have a big NGL part. Refineries are limited as to how much NGL’s they will blend into their feedstock when producing transportation fuels, which along with the lower energy content, explains why NGL’s sell at a big low cost to crude oil prices.

U.S. Manufacturing Booming
Led by booming shale output, the IEA noted that non-OPEC provide gains from nations such because the U.S. have been offsetting lowered OPEC manufacturing volumes seen from Libya, Nigeria, and Iran. The IEA raised its estimate of non-OPEC crude oil supply growth for 2013 by zero.1 million barrels per day to 1.Three million barrels per day of their report. For 2014 the IEA elevated the non-OPEC growth estimate to 1.8 million barrels per day. Keep in mind, as noted above, this contains NGL’s.

The huge increase in production within the U.S. has been centered in two states: North Dakota and Texas. Charts of historic crude oil manufacturing for the final 32 years set out beneath, courtesy James L. Williams of WTRG Economics (wtrg.com), illustrate the development:

Exponential Decline Curve
While output in the U.S. is booming, the IEA raised considerations about supply growth longer time period. The ‘decline curve’ — that’s the natural decline in production charges — from hydraulically fraced wells in the Bakken and within the Eagle Ford formations is far steeper than for the conventional wells drilled in 2000.

Addressing decline curve points for unconventional wells, Amrita Sen of London based Vitality Facets consulting just lately introduced her research to the Aviation Gas Forum in Miami. In a paper entitled “Reality Check: Scarcity to Abundance” she noted manufacturing declines in unconventional wells might be very steep, and in the first year “can range between 50-70%”. Chart at right courtesy London-based mostly Energy Aspects.

IEA World Demand Projections Raised for 2014
Primarily based on the most recent knowledge the IEA raised its 2013 global demand estimate to 91.0 barrels per day, and raised their 2014 estimate to 92.1 million barrels per day. That represents a roughly 1.Zero million barrel per day increase in 2013 and a 1.1 million barrel per day improve in 2014.

The consistent growth in crude oil demand over the years is illustrated in the chart at proper from the Monetary Occasions. Apart from the years during the good Recession crude oil demand grows relentlessly with the worldwide economy. We added the most recent IEA demand estimates for 2013 and 2014 (in pink).

The excellent news, brief term, is that if international demand will increase by 1.1 million barrels per day as projected by the IEA, and U.S. unconventional manufacturing along with other non-OPEC members will increase 1.8 million barrels per day, costs in 2014 ought to remain comparatively stable all different elements constant. The IEA report predicts the price of crude oil will stay on the higher end of its current range. But long term demand progress is relentless, yr after 12 months.

Provide Positive factors Are Pricey, and Getting Moreso
The disturbing portion of the IEA report famous that capital expenditures in the energy sector have seen an astronomical improve. “These ever higher levels of capital expenditure have yielded ever smaller increases in the global oil supply” in line with Mark Lewis, former head of power analysis at Deutsche Bank.

Capital expenditures for oil and fuel improvement elevated from $250 billion in 2000 to $700 billion in 2012 (in fixed dollars) in line with the IEA report, whereas the worldwide oil supply (adjusted for power content material) elevated by solely 14 p.c. The report famous annual investments have effectively doubled from $350 billion in 2005 to roughly $seven-hundred billion in 2012.

Reviewing the exponential improve, Lewis concluded “the most straightforward interpretation of this data is that the economics of oil have turn into completely dislocated from historic norms since 2000, and especially since 2005, with the trade investing at exponentially higher rates for more and more small incremental yields of energy”.

Trade has been keen to finance exploration efforts as world crude oil costs have elevated from $25 a barrel in 2000 to $110 in 2012 (chart at right courtesy Forbes). Since the cost curve for unconventional useful resource development is rising, together with capital expenditure necessities, any weakness in crude oil prices will probably be reflected in budgeting and can end in lowered developmental activity.

The “average cost curve for the oil market” chart below illustrates the truth that unconventional assets have a a lot larger break even price levels (courtesy Amrita Sen of London based Energy Elements). She concludes “shale performs lie at the higher finish of the non-OPEC marginal cost curve, as infrastructure construct-outs, decline rates, excessive ranges of rig exercise keep costs high”.

Morgan Stanley issued a report last month that additionally noted the rising incremental prices associated with rising oil production. Provide beneficial properties are expected to be substantial, but any worth declines would rapidly impact activity and provides. Morgan Stanley’s consultants expect oil costs to remain “range bound over the medium term” (Morgan Stanley value chart is about out at right).

The steep decline curve for unconventional production, coupled with a slowdown in developmental activity ought to oil costs weaken, may quickly cause a ‘supply crunch’ and higher prices according to the IEA report and comments by their Chief Economist.

World Refining Sector
The IEA’s World Energy Outlook additionally noted the huge world pure gasoline price discrepancy. Pure gas prices within the U.S. are presently one-third the price of pure gasoline in Europe and one-fifth the price in Japan. Expensive LNG imports to Japan, used as a power plant fuel to offset the shut-down of their nuclear power sector, have skyrocketed.

While global refinery throughput has declined since July we at the moment are within the ramp-up season for demand. Europe’s refiners noticed the worst of the decline. Throughput at their plants fell by greater than 1 million barrels per day to what may be their lowest degree since 1989 — 24 years in the past. World refining throughputs within the fourth quarter of 2013 are expected to increase 0.4 million barrels per day 12 months over 12 months.

Attributable to comparatively low cost natural fuel costs the IEA’s Chief Economist notes that extra energy-intensive industries will relocate in the U.S. Not only are European and Japanese plants paying way more for natural fuel, they are additionally shopping for crude priced on the upper-price Brent pricing, giving U.S. producers a roughly $10 per barrel benefit.

Add in electricity prices, that are normally a lot larger outside the U.S. and it’s little surprise that quite a lot of European refineries and chemical plants are experiencing financial difficulties. Refineries and chemical plants are in boom-mode within the U.S. with many announcing multimillion and multibillion dollar growth plans or new plants.

Document U.S. Refined Product Exports
Exports of refined products from the U.S. have tripled in the last few years, from 1 million barrels a day to more than three million barrels per day. In 2011 the United States exported more petroleum merchandise, on an annual foundation, than it imported for the primary time since 1949 — and the trend continues. November 2013 exports of gasoline should break all historic information in response to a lot of analysts, although official export data will not be released by the U.S. EIA until early subsequent 12 months (chart at right courtesy Monetary Instances, chart beneath courtesy U.S. EIA).

A part of the export trend is defined by the decrease feedstock and processing prices talked about above (crude oil, natural gas, electricity). But a big part of the trend can be explained by the fact that exports of crude oil from the U.S. have been limited because of statutory provisions adopted through the 1970’s period power disaster. bp oil refinery uk The export restrictions on crude oil do not apply to exports of refined products.

With crude oil output bp oil refinery uk spiking within the Bakken and Eagle Ford fields, and crude oil export alternatives limited, refiners are exporting rapidly rising amounts of refined products. Brazil, Argentina and Venezuela have all doubled the imports of refined products from the U.S. since 2012. Exports to Nigeria have additionally elevated considerably.

Additional, distorting the market the 1920 Jones Act restricts the transportation of refined products between U.S. ports to U.S. flagged and manned vessels — in consequence it costs one-third as much to ship gasoline from Houston to Europe or Africa because it does to ship it to New York. The Jones Act is a serious financial incentive for the export of refined products to overseas markets.

Investment Thesis
Short term unconventional oil reserves being developed in the U.S. and elsewhere seem like ushering in an period of cheap energy. In actuality larger prices will probably be needed to keep up the capital expenditures needed to extend manufacturing. Know-how should assist moderate cost inflation, however the IEA’s knowledge on capital expenditures within the energy sector indicate we’re spending considerably more to seek out less — at the very least in comparison with historical norms.