Mideast can flourish even with single digit oil prices

The so-called Shale Revolution is having a significant impact on the consciousness of the global energy industry, but in reality is it has one letter too many and is more of an evolution, that ultimately has little chance of deposing the Middle East as the most important energy supply region in the world.
Many of the techniques that are being employed within shale gas and shale oil are derived from the conventional energy industry.
When you look at how the gas and oil from shale is extracted, it’s the way the technologies from the conventional industry have been applied, and for that reason I think technically it’s very much an evolution.
It may appear as — from an energy supply perspective — as a revolution, an innovation, in the fact that companies and governments have identified that with $ 100 oil price they can extract economic producible hydrocarbon from these reserves that were previously thought uneconomic, and therefore didn’t warrant the investment.
And you’ve seen in the US a dramatic change in the energy landscape with an entire service sector building up around this new shale industry.
I think the economics are improving for shale gas and shale oil, but we need to separate the two when it comes to the consequence for the Middle East, which is very much dominated by crude oil production.
In the US, the new production is predominantly shale gas and some associated fluids and the reality is that it’s very complex to actually extract the shale hydrocarbon, making it much costlier than developing conventional reservoirs here in the Middle East.
It’s still cheaper, far, far cheaper, to produce the oil here and transport it across the world, and sell it to a market in North America or in the Asia Pacific than it is for them to locally extract their own shale hydrocarbons.
So yes, you will see an increase in shale production, particularly in North America, of associated fluids coming from shale gas and shale oil.
However, the economics will eventually balance things out.
And as the price declines you’ll see that the investment — and we’re already seeing the investment in shale gas— diminishing.
We’re seeing some of the largest players slowing down their drilling activity because the natural gas price has collapsed.
I think it’s those macroeconomic checks and balances that eventually will cause things to normalize as we move forward.
In the US, the fact is that their actual increase in demand of hydrocarbons has been leveling off, so the growth hasn’t been there.
However, there’s been increased domestic supply of oil. Shale is, by its very name, an unconventional energy source.
We don’t know as much about these particular types of reservoirs as we do about conventional reservoirs, such as the ones producing the largest majority of hydrocarbons here in the Middle East.
An energy-independent US narrative is being touted by politicians and the media, but a big question remains whether that is a realistic possibility — I mean, being energy dependent for a fortnight in 2020, well, it doesn’t really change anything, does it? You have to have the opportunity to be energy independent for decades for it to be a game-changing event.
And of course, if we talk about shale gas or oil, it’s not just a US story as the headlines would indicate — it is in South America, Europe, China and we have it here in the Middle East as well.
Saudi Arabia is fast-tracking its own shale gas developments, but the macroeconomic picture there is a case where there exists a desperate needs for gas. We’re in a region where we’re investing in nuclear energy to meet the soaring demand for power generation.
And the development of natural gas reserves, conventional and unconventional, will essentially result in having to burn less diesel oil at power stations during the peak summer demand period.
This will enable the national oil companies to release more oil for export. They can effectively generate more revenue from their existing energy reserves by exploiting another hydrocarbon resource, shale, to burn in their power stations.
Some analysts argue that the surge in shale supply could trigger an oil price collapse as it has done to natural gas prices in the US, but big drops in oil prices are typically associated with some form of economic shock i.e. the Asian economic collapse in 1990s sent oil prices crashing to $ 8 a barrel.
I myself was based in the North Sea at the time and that was the reason I ended up coming to work in the Middle East because this region could continue to flourish with single digit oil prices as the cost of exploiting the hydrocarbon here is so much less than everywhere else in the world.
Deep water exploration and production in the Gulf of Mexico will become uneconomic long before exploiting on-shore oil reserves will in the Middle East.
I think that the sudden supply gluts that some analysts forecast will result from the development of shale, take a very, very long time to build up, if ever — it not only takes a long time to drill and exploit the hydrocarbon, but it takes a long time to build the infrastructure to actually bring that hydrocarbon to market. So, from a strategic perspective, we’re not going to see a sudden dramatic over supply, particularly when OPEC will be managing its production capacity to minimize these kinds of shocks in actual supply and demand.
Shale’s implications for the environment are also still unknown and could act as a break in the surge of new supply due to the turbulent fracking process used to get shale out of the ground. The technique itself is designed to take very poor quality rock, the shale itself, and break it a part to create cracks within the rock, so that the fluids, the gas and the oil, can flow to the surface.
The environmental concern is often overstated for in most instances shale deposits are located deep, deep underground, but concerns are to be expected when shale is exploited at shallower depths that may be connected to water aquifers.
This will result in licenses being awarded on a case-by-case basis as the government agencies issuing the permits consider the socio-economic consequences of exploiting shale deposits, which has been a major hurdle to development in Europe.
— Stuart Walley is regional manager,
Middle East and India for Senergy.