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U.S. Shales in Perspective of a World Oil Supply in Transition.

Richard S. Bishop and Wayne L. Kelley
RSK[UK]LIMITED Houston, TX 77092

The world is not ‘running out of oil’ but there is concern about supply rate.

Historically, estimates of global oil supply have been based on a combination of resource volume and forecasted demand. The price was driven largely by the giant and super-giant conventional fields and reflected a rough parity of cost between the cheapest and most expensive producer. Today, the relatively low cost oil coming from the giants is no longer sufficient to meet global demand. Consequently, price is no longer driven by competition between suppliers but driven by competition between buyers. Thus the price of oil is now determined by the price buyers are willing to pay which is the most expensive oil needed to make up the total supply. The result is a ‘two tiered’ market of low cost oil (e.g. giant onshore fields) and high cost oil (e.g. shales, deep water fields) but a largely single price for oil.

The combination of technology and increased price has added large volumes to the reserve base but much of these additions are ‘high cost’ oil which is at the highest risk in the event of price declines.

Placing US shales in perspective is a multi-dimensional task and includes consideration of:

- Shut in capacity: excess production capacity has shrunk from 15 million BOPD to around 4 to 6 million BOPD. This means that global oil supply is evolving from one with flexibility to ‘just in time’. The impact on price driven by demand instead of low cost will become more significant as excess supply shrinks and low cost production cannot be expanded.

- Reserve addition/ increasing production: The cost to add new production ranges from approximately $25 billion per million BOPD to over $50 billion per million BOPD. We estimate that the giant fields (i.e., the low cost producers) are approximately 50 percent depleted and significant expansion of their production rate is unlikely. Furthermore, even though global reserve volumes have grown, the time and cost to add production has increased significantly.

- Logistics: Industry has limitations to how fast new production can be added, particularly from complex new resources. In addition ‘high cost’ oil resources require significant changes in the transportation and refining infrastructure.

- Capital: the increased costs obviously means one is investing in the higher cost asset, not the lowest. Further, there is increasing risk of political intervention in all areas of production.

- Politics: sanctity of contract and access to resources are increasingly significant concerns and limitations.

- Transfer of wealth: exporters of low cost oil are the primary beneficiaries of increased price. An unseen side effect of the transfer of wealth from importers to exporters has been to increase the fragility of the global financial system. The EIA estimates that over $500 billion USD per year is flowing into the Gulf Region which, especially when leveraged, can impact the global financial stability.

- Optimizing oil price: exporters will seek to maximize their profits but may also cause global economic restrictions thus reducing demand and increasing price volatility.

These changes have become more significant within the last decade and the consequences are beginning to emerge. The most visible is the tightening of excess supply and its vulnerability to interruption. This tightening is not likely to ease due to the high cost of adding new supply, limitations of low cost production, and lack of incentive for low cost producers to increase production.

The implication of these trends is a long term upward pressure on oil price which will support shale oil development. In contrast, the giant conventional gas fields of the world are in a much earlier stage of development resulting in long term price competition from the low cost gas giants in an emerging global gas market.


AAPG Search and Discovery Article #90164©2013 AAPG Southwest Section Meeting, Fredericksburg, Texas, April 6-10, 2013