The International Energy Agency highlights the transformative nature of the US oil boom in its latest Medium-Term Oil Market Report, released today.
“Rising supplies of US light, tight oil (LTO) have turned upside down, or at least called into question, the conventional wisdom about what oil is, how it is extracted, how much of it is left in the ground, and how it can be processed and used.”
Developments in hydraulic fracturing and horizontal drilling have enabled drillers operating in the US to unlock oil and condensate that were previously considered uneconomic to produce. This has contributed to rising US oil output, which grew to 6.5 million bbls/d in 2012 from a little less than 5.7 million bbls/d in 2011, according to Energy Information Administration data.
The IEA has upped its forecast for non-OPEC oil supply growth to 3.9 million bbls/d from 2012-2018. North America will account for more than half of additions – 1.4 mn bbls/d from the US, 1.3 million bbls/d from Canada, much of that from oil sands.
“Shockwaves of rising US shale gas and light tight oil and Canadian oil sands production are reaching virtually all recesses of the global oil market,” says the IEA in its 2013 Medium-Term Oil Market Report.
What’s Happening Now
“The initial impact of the LTO [light tight oil] boom on global crude markets has been indirect: rather than seeking out export markets, the new supply has so far affected international crude markets mostly by backing out imports.”
Most US oil exports are restricted by US law, but domestic production has displaced some crude imports, which fell to their lowest level since 1997 last year, according to EIA data. The IEA expects North American imports to decline by another 2.2 million bbls/d between 2013-2018.
But quality, in the context of the North American oil boom, may prove just as transformative as quantity.
“The case of US LTO is distinctive in that rising production is causing an unexpected quality shift in the global crude mix.”
The IEA points out that supply growth forecasts have assumed that crude quality would migrate towards heavier, sourer grades, but the surge in US onshore oil production is adding more light, sweet crude and field condensate to the mix.
This quality shift has thrown a monkey wrench into long-term planning predicated on a shift towards heavier, sourer crudes, and resulting modifications to refining capacity. “The supply boom is proving a challenge as well as an opportunity for others, which had bet on a widening heavy-light price spread and invested massively in upgrading capacity.”
What could happen later
“It is impossible to ignore the possibility that current non-conventional technologies, as they spread and get both perfected and mainstreamed, could lead to a wholesale reassessment of global reserves.”
Looking out beyond the five-year timeframe of the report, there is the potential for further upsets in global oil supplies if analogous formations are discovered, and effectively developed, in other regions.
“Unlocking of US LTO has opened up a world of possibilities. Expectations of future supply have begun to shift,” says the report. The IEA notes that the techniques used to develop tight oil are applicable to enhancing oil recovery from conventional oil fields, as well.
What Could Get in the Way
But the agency stressed that medium- and long-term obstacles remain to capitalizing on newly available sources of supply.
In the US, there are both logistical and regulatory challenges. Many unconventional formations in the US lack easy access to markets, and US crude export restrictions limit broader marketing options for new volumes. The IEA’s medium-term projections do not envisage significant changes to existing export restrictions by 2018.
And new inland trade flows have the potential to upset established pricing patterns. “New infrastructure designed to transport LTO to coastal markets may cause significant changes in crude and benchmark pricing,” said the IEA. New terminals, or even trading hubs, on the US Gulf Coast – where the country’s refining infrastructure is concentrated – could prompt the creation of new light oil-related benchmarks, the agency said.
What about natural gas?
“The surge in US shale gas production and associated shifts in natural gas pricing are challenging the conventional wisdom about fuel switching and gas-in-transport.”
The IEA’s forecast assumes that natural gas will make significant progress towards capturing a greater share of the US transportation market by 2018. But the agency does not expect transport gas to “happen in a big way” until well after the report timeframe, citing the need for massive infrastructure build-up to transition to a gas-fueled fleet. “The next five years are more likely to witness the rollout of the needed infrastructure,” the report says.
