Ushering in a new oil era
How a robust outlook for global oil demand is triggering exploration and production in the region
In spite of the downside risk for oil prices, there is therefore an ongoing need for long-term investment to develop a total of 670 billion barrels of new resources through to 2040 to account for decline in existing fields and to meet rising global demand – and here, once again, the key is Asia.
Much has been made of the decline of oil as the world’s long-term, primary source of energy, and the corresponding rise of renewable, alternative and unconventional energy.
But despite the anticipatory heralding of oil’s demise, the region’s oil producers are spending more than ever before on oil and gas production.
GCC oil producers have announced plans to spend in the region of $700bn on exploration and capacity expansion over the next decade, and currently have 174 projects in the pipeline.
So, what is driving this counter-intuitive spending in the Gulf, and why, when others are moving away from oil, are the region’s producers gearing up?
The bottom line is that oil remains the single largest energy source, and demand for oil is continuing to grow, from 99.2 million barrels a day (b/d) today to 105 million b/d by 2040, according to the International Energy Agency (IEA).
Even as global energy demand rises by 30 per cent through to 2040, hydrocarbon demand is set to largely keep pace, with its share of the total energy mix declining only marginally from its current 83 per cent to an estimated 78 per cent. However, while the demand will remain, the shape of global consumers is set to change.
By 2040, much of the growth in demand for oil and gas will be generated by Asia, which is expected to account for more than 70 per cent of global oil and gas imports by 2040, led by demand among the non-OECD Asian nations.
Demand will be strongly driven by the expansion of vehicle fleets and growth in refining and petrochemical capacity in emerging markets, especially in China and India, the region’s two largest economies.
As Aathira Prasad, director of macroeconomics at Nasser Saidi & Associates, notes: “Together, China and India consume more than 15 per cent of the oil consumed globally. There is demand for oil, because as your emerging economies grow, you’re seeing the likes of China and India becoming bigger consumers of oil.”
The critical question is where the oil supply will come from. At present, the global supply of oil is being reduced by 1.8 million b/d by the agreement between Opec and 11 non-Opec oil producers, headed by Russia.
At the same time, the US, which is not subject to that agreement, is rapidly ramping up its production of shale oil.
For Opec producers and the US, Asian markets represent an increasing battleground.
“If you’re looking at demand from Asia, it’s quite interesting to note that since the shale oil production in the US has picked up, the US has actually been gaining market share in Asia,” explains Prasad.
“So if you look at crude exports to the Asian countries, vis-a-vis what used to be Opec’s share into Asian countries, you will see that the US share is now quite high.”
The other factor to arise in the Asian supply equation in the last year is the planned reimposition of oil-related sanctions on Iran by the US from 4 November, which could see as much as 2.6 million b/d (Iran’s export volume for April) taken off the market.
That is unless Tehran’s three largest customers – China, India and South Korea – secure export exemptions or establish currency workarounds. This comes at a time when the supply of oil is already 1 million b/d short of demand due to Opec-led cuts.
The renewal of US sanctions on Iran plays into the hands of the Gulf oil producers in the sense that it creates additional demand in the market in spite of current production cuts – demand that can only be filled by nations with spare capacity.
Riyadh has already offered to compensate for reduced supply from Iran, saying it is ready to “mitigate” the impact.
Saudi Aramco is currently producing about 9.5 million b/d, but has the capacity to produce about 12.5 million b/d at a cost of $8 a barrel.
Kuwait has also sensed the opportunity the Iran oil sanction presents to exporters trading with the Asian market, with Kuwait’s Oil Minister Bakhit al-Rashidi saying the country can help offset a probable global oil supply deficit.
For both Saudi Arabia and Kuwait, the prospect of snapping up Iran’s market share in Asia presents a neat, near-term goal for the investment plans.
Indeed, Saudi Aramco remains committed to a 10-year capital expenditure (capex) budget of $414bn, while Kuwait has drawn up a budget of $112bn to be invested over the next five years. By 2020, Kuwait also plans to raise its output from today’s 3.2 million b/d to 4 million b/d.
Aramco’s plans also include certain specific recent efforts to secure future market share in Asia – most notably with its signing of an agreement in April to take a 50 per cent stake in a $44bn integrated refining complex being developed in India.
Saudi Aramco is also helping to finance a $27bn refinery and petrochemicals complex in Malaysia. The Saudi giant is also considering building refineries in China.
In April this year, Kuwait Oil Company began operations at a new facility to produce light oil and gas from its West al-Rawdatain field, as well as to produce a new blend grade aimed at its customers in northeast and southeast Asia.
Kuwait is also eyeing a stake in a downstream complex in central India as part of a deal that would guarantee the export of an additional 200,000 b/d of crude to India.
In the UAE, Abu Dhabi’s Adnoc has meanwhile drawn up a $109bn investment plan aimed at both upstream and downstream expansion.
Most of Adnoc’s 3 million b/d output is already shipped to customers in the East, but the company is working hard to cement its position – not least through its plans to store oil in India’s Strategic Petroleum Reserve for export both to India and the rest of Asia.
Abu Dhabi is also understood to be interested in buying into the same $44bn refining project as Saudi Aramco in order to ensure extra crude sales to New Delhi.
Beyond the expansion of existing upstream and downstream facilities at home and abroad, several of the Gulf’s national oil companies are actively exploring new reservoirs, and April witnessed the announcement of a wave of E&P licensing rounds.
Adnoc held its first ever licensing round – a programme in which it has declared four onshore and two offshore blocks open for bidding by international oil companies. Based on historical data and new seismic surveys, Adnoc in April announced the blocks contain “multi-billion barrels of oil” and “multi-trillion cubic feet of gas”. With 310 targeted reservoirs in the six blocks from 110 prospects and leads, the licensing round could propel Abu Dhabi to swing producer status.
Bahrain meanwhile announced its discovery of shale oil reserves off its western coast estimated to contain more than 80 billion barrels and tight gas reserves of between 10-20 trillion cubic feet.
Bahrain’s Oil Minister Sheikh Mohammed bin Khalifa al-Khalifa claims production from the oil and gas reserve is expected to begin in five years, and could turn the kingdom from a net oil importer to a net exporter of interest to Asia.
The industry has also been taken by surprise by the launch of the first oil and gas licensing round by Ras al-Khaimah, consisting of four shallow water offshore blocks and three onshore blocks. As with Abu Dhabi and Bahrain’s licensing rounds, the emirate’s offering is yet to undergo a commercial test, but if proven viable, it will further boost UAE output.
Finally, the month saw Iraq seek to reinvigorate its oil sector with a licensing round open to international oil companies (IOC). Though only six out of 11 blocks on offer were sold, with no major IOC present, the round notably saw two Chinese firms purchase operating rights, in another strong indicator of the increasingly pervasive influence of Asian demand on Middle East production.
Over the coming decades, oil production is set to become geographically more concentrated as high-cost producers gradually yield to low-cost producers. The share of global oil production accounted for by the Gulf, US and Russia is expected to grow from 60 per cent today to 69 per cent of total output by 2040.
In the nearer future, regulations being introduced by the International Maritime Organisation in 2020 requiring lower-sulphur shipping fuel is set to favour medium and heavy blends that, unlike oil from US shale, can readily be processed into middle distillates.
The IEA also predicts that once shale oil production in the US plateaus in the late 2020s and non-Opec production diminishes, the market will become more reliant on the Middle East once more.