RIYADH, Saudi Arabia/ Troy Media/ – The world may soon be experiencing a crude oil crunch.
There is no denying, of course, that the world is in the midst of a shale revolution. In fact, according to BP, the U.S. today has 44.2 billion barrels of oil reserves – some 26 per cent higher than it previously thought. The U.S. Energy Information Administration has also recently increased its estimate of U.S. reserves to 33.4 billion barrels, or 15 per cent more than previously thought.
And the potential in each shale play is believed to be still greater, with the Permian Basin really standing out. Pioneer Natural Resources now estimates the Spraberry/Wolfcamp shale formations in the Permian Basin contain 75 billion barrels equivalent of recoverable oil and gas. That number is actually a major upward revision from last year, when Pioneer estimated the two formations held 50 billion barrels equivalent of recoverable oil and gas.
New technologies and techniques, including closer spacing of wells, are also providing a big boost to future reserve estimates.
Meanwhile, new oil plays – the most promising of which, at the moment, appear to be the Tuscaloosa Marine shale in the Gulf Coast region and several shale plays in the Rockies – continue to emerge. Simultaneously, Canada has added another one million bpd, almost exclusively from the Alberta’s oil sands.
Yet, despite all this, the energy world is getting nervous courtesy the fluctuating geopolitical situation and despite ‘weakening fundamentals’. Because of the civil war in Libya, disturbances in Iraq, uprising in Syria, ideological tribal strife in Nigeria, and sanctions imposed against Iran, oil fields in Middle East and North Africa have been producing an estimated 3.5 million bpd less is recent months. And that’s not even mentioning the conflict in Ukraine.
In the wake of all this uncertainty, is there enough capacity available to meet the demand? The onus falls on the producers. OPEC, for one, says it is up to the challenge. Secretary General Abdullah al-Badri claims the group is ready to pump extra oil if needed. Analysts, however, are warning global capacity could struggle to cover any additional, major, outage.
Unrest in Iraq comes at a point in time when the world is already grappling with the almost total loss of the Libyan supply, Western sanctions on Iran and conflict in Syria. All this is keeping almost three million bpd – more than 3 per cent of world demand – off the market.
Analysts point out that, while more Saudi Arabian supply and the U.S. shale oil boom have helped plug the gaps so far, another crisis would deepen dependence on Riyadh. According to International Energy Agency estimates from last month, global spare production capacity today stands at 3.3 million bpd. Iraq exports about 2.5 million bpd from its southern terminals around Basra.
“If we were to have another big outage, spare capacity would be really tested,” Olivier Jakob, oil analyst at Petromatrix told Reuters. “The answer to a big disruption is going to come more from the SPR (the U.S.’ Strategic Petroleum Reserve) than from spare capacity.”
Of the 3.3 million bpd of spare capacity available globally today, some 2.65 million bpd is in Saudi Arabia alone, the IEA estimates. And “Saudi Arabia has the capability to produce up to 12.5 million bpd,” a Saudi official was quoted as saying. But there are limits too. The point is: to what extent is Riyadh willing to continue filling in the void – and for how long?
Some in the industry are beginning to question the sustainability of such a move by the Saudis. “Global spare capacity is 1.5 million bpd, overwhelmingly in Saudi Arabia, although for short periods of time we could draw on surge capacity of say another one million bpd,” a former IEA official was quoted as saying.
Indeed, Iran would have to play a role in plugging the gap, at least in the short term, if and when Western sanctions on Tehran are removed, which could happen if there is another big outage. Canada’s oil sands could also be used to help meet this growing global challenge.
The energy world has entered a new, dangerous phase. Despite emerging new frontiers, geopolitical developments are keeping the markets on boil. And the world needs to rise up to the challenge.