Musings: PwC Says Shale Oil 'The Next Energy Revolution' - Really?

Economists with the worldwide accounting firm of PricewaterhouseCoopers LLP (PwC) have just published an interesting and thought-provoking analysis of the long-term impact of shale oil on the global economy. While one might question some of the shale oil production numbers that evolve from the PwC analysis, the final couple of pages of the report, which focus on "opportunities and challenges for governments and companies" and touch on topics we have been devoting significant thought to with respect to the implications of the growth in output from unconventional oil and gas plays, is what we found most intriguing.

PwC begins its report with a brief review of the history to date of shale oil and shale gas in the United States. The economists point out that shale oil production has grown from 111,000 barrels per day (b/d) in 2004 to 553,000 b/d in 2011, or an annual growth rate of 26%, albeit starting from a very small base. We know shale oil production increased further in 2012. The oil production increase in North Dakota alone, where the Bakken tight oil formation dominates the output, rose by 233,805 b/d last year. Furthermore, the Energy Information Administration (EIA), in its supplemental information supporting its latest Short Term Energy Outlook (STEO), is calling for an increase in tight oil output between November 2012 and December 2014 of 1.13 million b/d, or nearly all of the projected total U.S. crude oil production increase during this period of 1.26 million b/d.

This optimistic outlook for tight oil production is driven both by the technical success producers are having in extracting the output and the high global price of oil. These two factors have contributed to the EIA estimating that the shale oil resources in this country have increased from 4 billion barrels in 2007 to 33 billion barrels in 2010, and we suspect the estimate will go higher when the next estimate is released. PwC says the EIA is estimating that U.S. shale oil production will grow at a much slower rate in the future than in the past, but it will reach 1.2 million b/d of output by 2035, or 12% of the nation's projected oil supply. They comment that this projection may be conservative given that other analysts are forecasting tight oil production to reach upwards of 3-4 million b/d by 2035. PwC believes that tight oil production will make the largest contribution to total U.S. oil supply growth by 2020, which would be consistent with the EIA's outlook in its latest STEO cited above. The implication of this forecast is that increased shale oil production will displace a significant volume of waterborne crude oil imports to the U.S., estimated to be potentially as much as a 35-40% decline.

In PwC's view, this scenario could lead to future oil prices being significantly lower than projected in current forecasts. Just how much lower the price might be becomes an interesting exercise in forecasting the global growth in shale oil production and the reaction of the leading conventional oil producers – primarily OPEC members. At the present time, the EIA estimates oil prices will reach $133 per barrel in real terms by 2035, which is a higher projected price than the International Energy Agency (IEA) forecasts, which is $127 per barrel.

PwC believes that global estimates of shale oil resources will be revised upwards significantly over time. That belief is based on the past pattern of shale oil and shale gas resource estimate changes in the United States. As a result, PwC believes that "global shale oil production has the potential to rise to up to 14 million barrels of oil per day by 2035," which would represent approximately 12% of global oil supply then. This production growth will have an impact on global oil prices according to PwC, depending on how OPEC members and Russia respond. PwC has developed two scenarios for predicting future oil prices – one that allows for OPEC to respond by lowering its output and the other with no OPEC response. In the former scenario, PwC sees the global oil price maintaining an average price of around $100 per barrel in real terms, while in the latter case it falls to $83 per barrel. Based on these two scenarios, PwC sees the potential for future global oil prices to be $33-50 per barrel lower than the EIA's reference case of $133 per barrel in 2035, in real terms. This reduced oil price is significant and raises numerous questions for governments and companies, while also creating significant opportunities and challenges.

By using the National Institute Global Econometric Model, PwC attempts to project the impact of its two price scenarios (a decline of $33 or $50 per barrel in real oil prices) on global economic activity. They conclude that at today's Gross Domestic Product (GDP) values, there could be "an increase in size of the global economy of around $1.7-2.7 trillion per annum. This could imply a rise by 2035 in average global GDP per person of between $230 and $370 per annum (at today's prices) relative to the EIA baseline case with minimal shale oil production." If the PwC price outlook proves correct, there will be a significant positive impact on future global economic activity and the wealth of various countries.

The economic model's results suggest that India and Japan could each see an increase in their GDP of between 4% and 7% by the end of the projection period. PwC sees other net oil importers such as the United States, China, Germany and the UK gaining between 2% and 5% in GDP over the period. On the other hand, OPEC member countries and Russia could experience deterioration in their current account balances due to the lower oil price. PwC points out, however, that the financial damage lower oil prices might cause for Russia could be offset if the country elects to exploit its large estimated shale oil resources. That would certainly favor ExxonMobil given its growing relationship with Russia's Rosneft Oil Company.

In the conclusion to its report, PwC briefly explores some of the implications growing global shale oil production will have on energy markets, energy companies and governments. It is the positive implications, on balance, from growing shale resource exploitation that gives us increased confidence that the long-term outlook for the United States will be positive, despite near-term domestic economic and political fears and growing concerns over the future geopolitical outlook. The magnitude of our optimism is likely to be shaded by the political, geopolitical and economic policies and actions of our leaders, but we don't doubt that the United States will reach the next decade in a surprisingly stronger relative position than most prognostications suggest today.

Given PwC's belief in the potential for significant oil shale production and resulting lower future oil prices, the firm's economists say that the financial case for renewables becomes relatively less attractive. There is little doubt about that reality, but the argument for developing renewable energy projects has rarely been about their financial viability, but rather about the social responsibility from building them. To the extent that government mandates for greater investment in renewable energy projects increases, then the nation's future economy could be somewhat smaller as energy capital could be misdirected into investments that are uneconomic and have a greater likelihood of being abandoned in the future much like the wind farms built during the 1980s in California.

Lower oil prices will also impact the pace of development of more expensive and less environmentally attractive oil supplies such as Arctic and oil sands resources. While these two resources currently are being attacked on environmental grounds, their vulnerability to low returns on capital investment may be what actually curtails their future development. Given this trend, oil companies will need to reassess their current portfolios against lower future oil prices. This reassessment may become a catalyst for accelerated merger and acquisition activity as large, integrated oil companies target undervalued, financially challenged smaller oil and gas companies possessing attractive resource holdings. The lower cost of capital and greater financial resources to withstand periods of increased commodity price volatility, coupled with greater R&D capabilities to reduce finding and development costs gives the large, integrated oil companies a significant competitive advantage.

Companies that are targeting offshore oil and gas developments exclusively may find a need to seek diversification of focus. That goes for both oil and gas producers and oilfield service companies. Here again, M&A activity may be the easiest and fastest way for single-purpose entities to become more broadly diversified. In the same vein, the governments of OPEC members and other net oil and gas exporters may need to reassess the impact on their budgets of reduced oil prices and possibly lower oil production. While there always remains the possibility that reduced oil prices will stimulate greater oil consumption in the future, the changing demographics of the global population and recent legislative initiatives to reduce energy consumption will bake into the future energy outlook a flattish energy demand growth profile.

The big winners in the PwC scenarios are those companies and industries that use oil and its by-products in their own output. Lower energy prices have already produced a resurgence of on-shoring previously exported businesses. Changing demographics in historically cheap labor markets such as China and Asia has led to U.S. manufacturing companies restarting domestic production of capital equipment and durable goods. Importantly, the belief in the potential of abundant natural gas supplies and thus cheap feedstock costs is leading to a revival of the domestic petrochemical industry and the emergence of a nascent liquefied natural gas exporting business. As it took decades for these companies to abandon the rapidly growing high-cost energy environment that characterized the U.S. during the latter part of the last century and the early years of the current one, manufacturers will not be quick to shift out of the U.S. at the first uptick in energy costs as they perceive that our nation has built a long-term global competitive cost advantage.

So while we rail against the destructive economic and political decisions being made in our seats of government today, we see an opportunity for the domestic GDP pie to be larger in the future; just how much larger will be determined by the decisions of politicians in the near-term. At some point in the distant future, we anticipate looking backwards and marveling at how resilient the U.S. economy proved to be and how it overcame the many dire predictions of its demise due to the idiotic political and economic actions of our rulers. We will probably wind up tipping our hat to the benefits created by the great American shale revolution begun by the son of Greek immigrant parents from Galveston, Texas – George Mitchell. While many people would call him a true entrepreneur, and he was/is, based on our encounters with him, we would say he was more like Nellie from South Pacific fame that Rodgers and Hammerstein deemed "A Cockeyed Optimist."

G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.

Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

View the original article here

Musings: PwC Says Shale Oil 'The Next Energy Revolution' - Really?

Economists with the worldwide accounting firm of PricewaterhouseCoopers LLP (PwC) have just published an interesting and thought-provoking analysis of the long-term impact of shale oil on the global economy. While one might question some of the shale oil production numbers that evolve from the PwC analysis, the final couple of pages of the report, which focus on "opportunities and challenges for governments and companies" and touch on topics we have been devoting significant thought to with respect to the implications of the growth in output from unconventional oil and gas plays, is what we found most intriguing.

PwC begins its report with a brief review of the history to date of shale oil and shale gas in the United States. The economists point out that shale oil production has grown from 111,000 barrels per day (b/d) in 2004 to 553,000 b/d in 2011, or an annual growth rate of 26%, albeit starting from a very small base. We know shale oil production increased further in 2012. The oil production increase in North Dakota alone, where the Bakken tight oil formation dominates the output, rose by 233,805 b/d last year. Furthermore, the Energy Information Administration (EIA), in its supplemental information supporting its latest Short Term Energy Outlook (STEO), is calling for an increase in tight oil output between November 2012 and December 2014 of 1.13 million b/d, or nearly all of the projected total U.S. crude oil production increase during this period of 1.26 million b/d.

This optimistic outlook for tight oil production is driven both by the technical success producers are having in extracting the output and the high global price of oil. These two factors have contributed to the EIA estimating that the shale oil resources in this country have increased from 4 billion barrels in 2007 to 33 billion barrels in 2010, and we suspect the estimate will go higher when the next estimate is released. PwC says the EIA is estimating that U.S. shale oil production will grow at a much slower rate in the future than in the past, but it will reach 1.2 million b/d of output by 2035, or 12% of the nation's projected oil supply. They comment that this projection may be conservative given that other analysts are forecasting tight oil production to reach upwards of 3-4 million b/d by 2035. PwC believes that tight oil production will make the largest contribution to total U.S. oil supply growth by 2020, which would be consistent with the EIA's outlook in its latest STEO cited above. The implication of this forecast is that increased shale oil production will displace a significant volume of waterborne crude oil imports to the U.S., estimated to be potentially as much as a 35-40% decline.

In PwC's view, this scenario could lead to future oil prices being significantly lower than projected in current forecasts. Just how much lower the price might be becomes an interesting exercise in forecasting the global growth in shale oil production and the reaction of the leading conventional oil producers – primarily OPEC members. At the present time, the EIA estimates oil prices will reach $133 per barrel in real terms by 2035, which is a higher projected price than the International Energy Agency (IEA) forecasts, which is $127 per barrel.

PwC believes that global estimates of shale oil resources will be revised upwards significantly over time. That belief is based on the past pattern of shale oil and shale gas resource estimate changes in the United States. As a result, PwC believes that "global shale oil production has the potential to rise to up to 14 million barrels of oil per day by 2035," which would represent approximately 12% of global oil supply then. This production growth will have an impact on global oil prices according to PwC, depending on how OPEC members and Russia respond. PwC has developed two scenarios for predicting future oil prices – one that allows for OPEC to respond by lowering its output and the other with no OPEC response. In the former scenario, PwC sees the global oil price maintaining an average price of around $100 per barrel in real terms, while in the latter case it falls to $83 per barrel. Based on these two scenarios, PwC sees the potential for future global oil prices to be $33-50 per barrel lower than the EIA's reference case of $133 per barrel in 2035, in real terms. This reduced oil price is significant and raises numerous questions for governments and companies, while also creating significant opportunities and challenges.

By using the National Institute Global Econometric Model, PwC attempts to project the impact of its two price scenarios (a decline of $33 or $50 per barrel in real oil prices) on global economic activity. They conclude that at today's Gross Domestic Product (GDP) values, there could be "an increase in size of the global economy of around $1.7-2.7 trillion per annum. This could imply a rise by 2035 in average global GDP per person of between $230 and $370 per annum (at today's prices) relative to the EIA baseline case with minimal shale oil production." If the PwC price outlook proves correct, there will be a significant positive impact on future global economic activity and the wealth of various countries.

The economic model's results suggest that India and Japan could each see an increase in their GDP of between 4% and 7% by the end of the projection period. PwC sees other net oil importers such as the United States, China, Germany and the UK gaining between 2% and 5% in GDP over the period. On the other hand, OPEC member countries and Russia could experience deterioration in their current account balances due to the lower oil price. PwC points out, however, that the financial damage lower oil prices might cause for Russia could be offset if the country elects to exploit its large estimated shale oil resources. That would certainly favor ExxonMobil given its growing relationship with Russia's Rosneft Oil Company.

In the conclusion to its report, PwC briefly explores some of the implications growing global shale oil production will have on energy markets, energy companies and governments. It is the positive implications, on balance, from growing shale resource exploitation that gives us increased confidence that the long-term outlook for the United States will be positive, despite near-term domestic economic and political fears and growing concerns over the future geopolitical outlook. The magnitude of our optimism is likely to be shaded by the political, geopolitical and economic policies and actions of our leaders, but we don't doubt that the United States will reach the next decade in a surprisingly stronger relative position than most prognostications suggest today.

Given PwC's belief in the potential for significant oil shale production and resulting lower future oil prices, the firm's economists say that the financial case for renewables becomes relatively less attractive. There is little doubt about that reality, but the argument for developing renewable energy projects has rarely been about their financial viability, but rather about the social responsibility from building them. To the extent that government mandates for greater investment in renewable energy projects increases, then the nation's future economy could be somewhat smaller as energy capital could be misdirected into investments that are uneconomic and have a greater likelihood of being abandoned in the future much like the wind farms built during the 1980s in California.

Lower oil prices will also impact the pace of development of more expensive and less environmentally attractive oil supplies such as Arctic and oil sands resources. While these two resources currently are being attacked on environmental grounds, their vulnerability to low returns on capital investment may be what actually curtails their future development. Given this trend, oil companies will need to reassess their current portfolios against lower future oil prices. This reassessment may become a catalyst for accelerated merger and acquisition activity as large, integrated oil companies target undervalued, financially challenged smaller oil and gas companies possessing attractive resource holdings. The lower cost of capital and greater financial resources to withstand periods of increased commodity price volatility, coupled with greater R&D capabilities to reduce finding and development costs gives the large, integrated oil companies a significant competitive advantage.

Companies that are targeting offshore oil and gas developments exclusively may find a need to seek diversification of focus. That goes for both oil and gas producers and oilfield service companies. Here again, M&A activity may be the easiest and fastest way for single-purpose entities to become more broadly diversified. In the same vein, the governments of OPEC members and other net oil and gas exporters may need to reassess the impact on their budgets of reduced oil prices and possibly lower oil production. While there always remains the possibility that reduced oil prices will stimulate greater oil consumption in the future, the changing demographics of the global population and recent legislative initiatives to reduce energy consumption will bake into the future energy outlook a flattish energy demand growth profile.

The big winners in the PwC scenarios are those companies and industries that use oil and its by-products in their own output. Lower energy prices have already produced a resurgence of on-shoring previously exported businesses. Changing demographics in historically cheap labor markets such as China and Asia has led to U.S. manufacturing companies restarting domestic production of capital equipment and durable goods. Importantly, the belief in the potential of abundant natural gas supplies and thus cheap feedstock costs is leading to a revival of the domestic petrochemical industry and the emergence of a nascent liquefied natural gas exporting business. As it took decades for these companies to abandon the rapidly growing high-cost energy environment that characterized the U.S. during the latter part of the last century and the early years of the current one, manufacturers will not be quick to shift out of the U.S. at the first uptick in energy costs as they perceive that our nation has built a long-term global competitive cost advantage.

So while we rail against the destructive economic and political decisions being made in our seats of government today, we see an opportunity for the domestic GDP pie to be larger in the future; just how much larger will be determined by the decisions of politicians in the near-term. At some point in the distant future, we anticipate looking backwards and marveling at how resilient the U.S. economy proved to be and how it overcame the many dire predictions of its demise due to the idiotic political and economic actions of our rulers. We will probably wind up tipping our hat to the benefits created by the great American shale revolution begun by the son of Greek immigrant parents from Galveston, Texas – George Mitchell. While many people would call him a true entrepreneur, and he was/is, based on our encounters with him, we would say he was more like Nellie from South Pacific fame that Rodgers and Hammerstein deemed "A Cockeyed Optimist."

G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.

Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

View the original article here

Will Mariner Jumpstart UK's Heavy Oil Revolution?

Statoil's decision in December to go ahead with spending an estimated $7 billion-plus on developing the Mariner heavy oil field was a welcome boon for the UK oil and gas sector.

Already in early 2013, Statoil is recruiting people for the project – which will see an estimated 700 people directly employed by the firm in long-term, full-time positions. Two hundred of these roles will be onshore jobs at the firm's operation center in Aberdeen, while more than 500 will be offshore positions. Statoil plans to recruit most of the people it will need for the project in the UK, particularly in Scotland in the Aberdeen region.

But far more than 700 jobs will be created thanks to the project, according to Oil & Gas UK Economics Director Mike Tholen.

"What you tend to see is that there is a ratio of about two or three to one. So, for every direct job there are two-to-three indirect jobs supporting them one way or the other," Tholen told Rigzone in a recent phone interview.

This suggests that perhaps as many as 2,000 indirect jobs can be created from the project.

Mariner "will have a wider impact, obviously. Everything from the trivial, such as office services, through to the substantial: engineering, manufacturing and other technical work. So, it's bound to enlarge the skills, demand and work not just in Aberdeen but beyond as well."

Discovered more than 30 years ago, the Mariner Field consists of two shallow reservoirs: the Maureen Formation and the Heimdal Sandtsones of the Lista Formation. With nearly two billion barrels of heavy oil in place (with gravity ranging from 12 to 14 API), the development of the field will be the biggest on the UK Continental Shelf for a decade.

The Mariner field development concept

Statoil expects to begin production from Mariner in 2017 and once developed it is expected to produce for 30 years. The average production is estimated at around 55,000 barrels of oil per day for the first three years of the development's life.

Statoil has stated that the project will require pioneering technology for it to work. Discovered in 1981, the Mariner field was subject to a number of development studies by different operators – all to no avail. This changed when Statoil came on board as operator in 2007.

Mariner "was discovered more than 30 years ago but no operator has until now been able to put forward a development concept that allows for a possible development," Bård Glad Pedersen, a Statoil spokesman, explained to Rigzone recently. "We are proud that we have been able to do it. The challenge with heavy oil is obviously to get it out of the ground effectively and to reach a recovery factor that is satisfactory."

It also helps that Statoil already has some heavy oil experience.

"Previously we have done the field development of Grane on the Norwegian Continental Shelf and Peregrino, offshore Brazil," Pedersen added.

Oil & Gas UK's Tholen agrees with this view.

"The sort of technologies they are relying on have really continued to develop a lot over recent years and Statoil, because of the experience they have elsewhere, are very much ahead of the game in how to process and handle this sort of oil," he said.

Statoil's approach to developing Mariner will involve a lot of wells (around 50), as well as sidetracks. This is because of the extraction of heavy oil means low well flow rates. But the process will also be designed to handle large liquid rates and oil-water emulsions because of predicted early water breakthrough.

The field will be developed with a production, drilling and quarters (PDQ) platform with a floating storage unit that will have a capacity of 850,000 barrels. A jackup will also be used for the first four-to-five years of the project.

Statoil has already started awarding contracts to contractors and subcontractors for the Mariner project.

For instance, the contract award for the engineering, procurement and construction of a steel jacket for the platform has been made to Spanish firm Dragados Offshore, who will work with UK-based SNC Lavalin on the detailed engineering of the jacket.

UK-based engineering firms CB&I and Rig Design Services will work with Daewoo Shipbuilding and Marine Engineering Co. to deliver the topside for the platform. Meanwhile, Saipem's UK business has been awarded the contract for heavy lift operations.

But there are still plenty of contracts to be awarded and Statoil has stated that it has already seen a lot of interest from suppliers for Mariner work.

Statoil’s Mariner project is an indication that other heavy oil fields in UK waters can also be developed. The Mariner project has been feasible due to a combination of a can-do operator with the technology to extract heavy oil at a manageable cost, a healthy range of prices for crude oil and a sensible tax regime, Tholen said.

The UK's tax regime "has flexed sufficiently to really encourage this investment", according to Tholen. Indeed, Statoil has pointed out that the UK government's 2012 expansion of the Ring Fence Expenditure Supplement – a measure designed to support investment in marginal fields – was a positive move that affected its decision to develop the Mariner field.

"I think it is very much the fact that in the last couple of years the UK Treasury has been paying a lot more attention to our industry because it recognizes that we mostly can sustain our investment," said Tholen.

"We're not so much 'over the barrel' when it comes to access to finance. Ours is an industry where it is how you attract the investment into the UK given that the investment will, in turn, create both new jobs and new tax yield for the Treasury. So, it sees that this is a good business to be involved in and recognizes, not least in this case, that the tax regime was holding an investment back."

Because of this softening towards the oil and gas industry by the UK's tax authorities, Tholen expects that there will be further heavy oil developments on the UK Continental Shelf.

"I am confident that there are other companies looking at other major heavy oil developments at the minute. No doubt, they'll be looking at the progress of this one as well with interest," he said.

A former engineer, Jon is an award-winning editor who has covered the technology, engineering and energy sectors since the mid-1990s. Email Jon at jmainwaring@rigzone.com.

Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

View the original article here

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