Are we witnessing a "new oil order"?
The much publicized argument that the oil center of gravity is moving from the Middle East to the Western hemisphere is being considered of late.
For the past few years, a number of reports and studies highlighted the potential impact of the sand oil in Canada, the fracturing technology that has released oil and gas supplies in the US, and the deep water technology that has allowed for tapping pre-salt oil bounties in Brazil.
These three developments, based on new technologies, have led to what is called “The New Oil Order” by Daniel Yergin, a reputable researcher and author on energy issues.
In a widely acknowledged article he wrote two years ago, he said the center of gravity as far as the oil business is concerned is moving westward to the pacific although for the past five decades the Middle East continued to be the center of world attention no matter what discoveries were made in other parts of the world.
The 1970’s were a good example of this. The rise of oil prices following the quadrupling of the barrel price led to bringing in new supplies to the market from non-commercial, non-conventional places like Alaska and the North Sea.
Though these supplies have put huge pressure on OPEC supplies and its attempts to control prices, in the end they proved to be of minimal impact. OPEC continued to play the role as a residual supplier.
The same seems to be happening now with the talk of new supplies coming from the Western hemisphere. A lot has been said and written about fracturing and the current assessment is that it can improve the United States’ domestic supplies in the next few years.
However, it does not look like having potential for a sustained growth to the extent that Washington will reach the stage of self-sufficiency given what appeared to be lesser reserves than what were thought originally and high investment needed to continue on pumping out oil.
According to the Paris-based International Energy Agency, supplies from shale oil through the use of fracturing technology can help the US for some time, but it has to turn back to the Middle East down the road to satisfy its growing needs.
Brazil was an area highlighted as a potential source of new supplies but six years after a lot of publicity, high expectations started to settle down for something more modest. There are no longer talks about potential reserves of 100 billion barrels or more than 400 billion oil reserves in the pre-salt area in the deep waters as was the case back in 2007, when discoveries were made and plans were drawn up to raise Brazil’s oil production from 2 million barrels per day (bpd) to 5.3 million bpd by 2020.
According to recent statements by Brazil’ Energy Minister Edison Lobao, there is only a possibility to pump out 4.7 million bpd in a decade’s time. And by then Brazil needs to allocate 3.1 million bpd of that production to meet domestic consumption, which leaves only 1.6 million bpd for export. Even if those figures are seen by some energy experts with optimism, they amount to what an OPEC member like Venezuela is currently exporting, and can sustain and increase.
Another hurdle is the huge investments needed to unlock these supplies from the pre-salt belt.
Some bankers put the figure at the hobble $237 billion, which makes it the most expensive project. State-owned Petrobras oil company’s ability to raise such prohibitive amounts of money is questioned given the difficulties it is facing in various areas.
Is the new frontier meeting the same fate that Alaska and the North Sea faced, that is, becoming a marginal supplier, while the Middle East continued its central role as the residual supplier given its huge reserves and relatively low cost of extracting oil?
That may be the bottom line, but still there are challenges. One of them is that there are opportunities on the short-term all over the world, including developed one as in the US and Canada, and big companies with their investments heading now.
Moreover, the Middle East suffers from political and security instability as exemplified by what is happening in Libya.
That leaves the Gulf producers with the challenge of how to wither the current storm so as to continue to play their strategic role in the oil market.