Jadwa Investment, the diversified Islamic investment bank headquartered in Riyadh, released the findings of its first Outlook for Unconventional Oil & Gas today. The report, which was compiled using a number of technical studies, research papers, industry reports and press articles, examines the potential impact of the tight oil and shale gas boom in the United States of America and elsewhere on the global energy industry in general and on Saudi Arabia’s long-term positioning in the world’s energy markets.
Technological advancements in recent years have helped the US exploit its significant unconventional reserves of oil and gas, allowing it to become one of the world’s leading producers of hydrocarbons and helping reduce its imports. However, Jadwa Investment’s Outlook on Unconventional Oil & Gas concludes that production from these sources may not grow as fast and as much as most commentators suggest.This is due to the limited productivity of oil wells in tight rock formations, the very steep decline rates of tight oil and shale gas wells, and the now uneconomic nature of some shale wells due to depressed US natural gas prices, which themselves resulted from rapid supply increases.
Dr Fahad Al Turki, Head of Research at Jadwa Investment, explained the findings of the report, “Understanding the impact of the US tight oil and shale gas boom requires us to look at the overall demand-supply dynamic for oil and gas, both today and in the future. Jadwa Investment’s research team carefully studied and interpreted publicly available data and research to arrive at these conclusions. We therefore considered the factors which will drive the evolution of oil and gas markets, the innovations which made the ‘revolution’ in tight oil and shale gas possible, and how this revolution will affect global oil and gas demand in the next quarter of a century.”
According to the US Energy Information Administration, US domestic oil production in November climbed above an average of 8 million barrels per day for the first time in almost 25 years. The Organisation of Petroleum Exporting Countries (OPEC) has stated that in 2014 the demand for its members’ crude oil production should average 29.57 million barrels of oil per day (bpd), some 300,000bpd less than in 2013. The decline in demand for OPEC’s production is attributed to the increase in production by non-OPEC countries, mainly by the US and Canada.
“As a result of increased production in the US from tight oil and shale gas formations, we see the main impact on Saudi Arabia through the reduction of price differentials between light and heavy crudes on one hand, which could change how oil is refined in places like Europe, and a more significant impact on the petrochemicals industry on the other hand, due to the large output of cheap yet valuable natural gas liquids (NGLs) which are used as feedstock in this industry,” added Dr Al Turki.
In effect, petrochemical industries in Saudi Arabia could find their comparative profitability reduced by the cheap NGLs. This, in turn, could even encourage some Saudi petrochemical firms to expand their capacity in the US in order to benefit from the abundance of cheap feedstock.
He concluded, “The key long-term challenge facing Saudi Arabia’s oil and gas industry remains the high and growing domestic demand for hydrocarbons. This is exacerbated by low prices locally, which will distort internal economic decisions and reduce the available income from the Kingdom’s oil exports.”
The report also examined the role of other unconventional sources of oil and gas, including deep-water fields, oil sands and extra-heavy oil, noting that they will become economically viable as conventional sources are depleted, technology develops and oil prices increase.
