With the US pursuing shale independence, will China come to determine future oil demand?
A wave of intense energy related diplomacy has been on the horizon. A flurry of visits by global energy leaders to Riyadh, once again brought into limelight the growing global shale output, its geopolitical and economic impact on this oil rich region and the changing global energy horizon.
Energy and politics cannot stay away for too long. During his visit to Riyadh early last week, the visiting US Energy Secretary Ernest Moniz discussed long-term US energy interests with the Saudi Minister of Petroleum and Mineral Resources Ali Al-Naimi and the Assistant Petroleum Minister, Prince Abdulaziz bin Salman.
With talks of Washington losing interest in the region resulting in a major geopolitical shift, Moniz reportedly assured his Saudi counterparts of Washington’s long-standing and enduring interests in maintaining strong ties with Saudi Arabia and the Gulf region. "The United States and Saudi Arabia are strong partners in energy cooperation. I see our relationship only getting stronger in the years ahead, not only on conventional market issues, but also on energy efficiency, nuclear and renewable energy, and science and technology research, where Saudi Arabia has made great strides in recent years," Moniz underlined.
And in return, Riyadh welcomed the ongoing surge in US shale oil production for its stabilizing effect on crude prices. "Shale oil has been also discussed and the rise in production from the US and other countries," Naimi was quoted as saying after the meeting. "The Kingdom welcomes this new source of energy supplies that contribute to meeting rising global energy demand and also contribute to the stability of the oil markets."
With Brent crude has lost 4.3 percent in the past year, Naimi last Thursday also received IEA Executive Director Maria van der Hoeven at his office in Riyadh. The two reportedly discussed the effects of growing US shale oil production on global oil markets. The International Energy Agency says that as a result of new exploration technologies, the US will become the world’s largest oil producer by 2016, temporarily overtaking Russia and Saudi Arabia.
In the meantime, the IEA, IEF and OPEC held its fourth symposium on global energy outlooks at IEF Headquarters in Riyadh last week, facilitating the sharing of insights and the exchange of respective views about the emerging energy market trends, the short, medium and long-term energy outlooks. And a day prior to the symposium, the IEF organized an open day at its headquarters presenting the global energy perspectives - from Asia to the Americas.
While looking through her Crystal Ball, Kate Dourian, a regional analyst currently with MEES as senior editor, painted a rather bleak picture, underlining that OPEC will ultimately have to face competition from within - on market prices if not on market share. She also raised the issue of investments in the energy sector in the region, especially since the global focus seems to be shifting towards Africa, rather than the region.
Dourian was also apprehensive of the turmoil in the entire region - from Egypt to Syria and Libya, on the emerging energy prospects. Interestingly, the Algerian ambassador sitting next to me, asserted she was totally disconnected from the reality.
And despite talks of a shale revolution overtaking the energy world, Ivan Sandrea, the former Vice President of Global Strategy and Business Development at Statoil and currently a senior partner, global oil and gas, at Ernst & Young, however, raised many questions about its very viability, sustainability and prospects.
Although the initial production rates from shale formations have improved in recent years, apparently due to technological advances, yet he emphasized that it declines rapidly after 12 months of operation and recovery factor continues to remain low and haunt the industry. This was basically due to the typical geology of such formations - apparently a hard nut to crack.
Sandrea also underlined that unlike conventional wells, capital expenditure at shale formations is a never ending process with cost of extraction varying from $34 a barrel to $81 a barrel and break-evens highly variable and unpredictable, making investments in the sector a very risky undertaking. Consequent to this companies continue to remain stressed, he emphasized. The industry cannot continue in the current circumstances and that there was no (shale) wave on horizon, Sandrea was forthright in his view of the industry.
And this was in sharp contrast to what Michael Schaal, Director, Office of Petroleum, Natural Gas and Biofuels analysis at the EIA was expected to present that day. And although Schaal was unable to make it to Riyadh in time to make his assertions, yet his presentation distributed to those present that day, pointed to the rapid gas and shale output rise in the United States - an almost wave like scenario.
Giving out the drilling productivity report, Schaal reminded that six shale plays account for nearly 90 percent of domestic US oil output growth and virtually all domestic natural gas output growth over the last few years. And to some extent, countering the propositions made by Sandrea, this presentation also asserted that rather than increase in rig count, higher drilling efficiency and new well productivity were the main drivers of the recent production growth registered in the US.
Takayuki Kusajima, project manager, energy affairs department, Research Division at Toyota Motor Corporation briefed the audience of a number of steps being undertaken by his company to promote efficiency. These included, but indeed not limited to, lowering the rolling resistance, weight reduction, improving aero dynamics and efficient power train to improve overall engine efficiency. He also emphasized on steps to improve traffic flow, so as to improve the overall efficiency.
And as the global energy fulcrum moves east, China, emerging as the major driver of global crude dynamics, is under spotlight. And there are reasons too. Victor Gao, the Vice Chairman of Sino-Europe United Investment, who at one point in time acted as the translator and interpreter for the Chinese leader Deng Zhao Ping, asserted that not only China was the largest global manufacturer of 220 major products, it also produced more than 22 million vehicles, including 20 million passenger cars, with most being sold in domestic markets.
Despite all the uncertainty that bedevils the energy world today, Gao asserted, the only constant one could talk of today is that China’s crude consumption would continue to grow, providing a backdrop to the Chinese saying: We will go wherever there is oil.
In 2013 China consumed 518 tons and imported 300 million tons of crude and the figure was to rise significantly in the coming years, he underlined. Saudi Arabia remains the largest supplier of crude to China, exporting 54 million tons of crude to Beijing in 2012 and around 60 million tons in 2013.
China also fully supports the possibility of American energy independence - for one simple reason, Gao reiterated: This would help a major competitor away from the crude markets, ensuring greater stability. New dimensions continue to drive the global crude markets.