INSIGHT: US facing major oil price shock - maybe

05 July 2007 16:27  [Source: ICIS news]

By Joe Kamalick

 

WASHINGTON (ICIS news)--A combination of North American production shortfalls and delays in major Canadian pipeline projects could cause drastic increases in US crude and natural gas prices in the near future, a top energy specialist warns.

 

Or, maybe not. 

 

Other soothsayers say advances in deepwater drilling in the US Gulf and sharp gains in global production and shipment of liquefied natural gas (LNG) will save the day - or at least keep the US and the world from energy starvation.

 

First, the bad news.

 

Energy specialist Andrew Weissman of FTI Consulting paints a dire picture of declining North American oil production over the near term even as continuing economic growth will be demanding ever more hydrocarbon-based energy.

 

“There are several troubling developments under way that mean much higher oil energy costs for the US,” Weissman said.

 

First, he cited the recent 2007 international energy outlook from the US Energy Information Administration (EIA) that forecasts much lower oil production from Mexico over the next few years.

 

“The EIA has forecast that by 2017 Mexican oil production will be 1m bbl/day less than EIA had anticipated as recently as last year in its 2006 outlook,” Weissman said, adding: “This is not good news from the number two foreign oil supplier to the US.” 

 

Indeed, the administration in 2006 had forecast that Mexico’s oil production would reach 4m bbl/day within a few years, up from its current output of around 3.4m bbl/day. 

 

However, in its recently released 2007 international outlook, the administration revised its forecast for Mexican oil output downward to only about 3m bbl/day by the end of the decade - meaning 1m bbl/day less oil for the US from Mexico than had been anticipated.

 

Second, when ExxonMobil CEO Rex Tillerson addressed reporters at the company’s annual meeting earlier this year, he strongly suggested that both the mammoth Alaska pipeline and the more modest Mackenzie pipeline projects are not likely to be built anytime in the foreseeable future due to costs.

 

Tillerson said the Mackenzie pipeline - which is to bring natural gas supplies to western Canada’s oil sands development - is “not economic at the current cost”.

 

Gas deliveries to western Canada are essential to move forward with gas-dependent oil sands development. Without those gas supplies, Canada likely will not be producing the “additional 2.5m bbl/day of unconventional output from oil sands projects” that the EIA this year said would “more than offset the decline in traditional oil supplies” from that country.

 

So just between Mexican and Canadian oil supply setbacks, within a few years the US is looking at a potential daily shortfall of as much as 3.5m bbl/day of oil supply that the EIA had been counting on as available for US consumption.

 

Tillerson said original cost estimates for both the Mackenzie and Alaska gas pipeline projects are grossly out of date. 

 

He said the Alaska pipeline project, designed to bring vast stores of Alaskan natgas to the lower 48 US states and originally forecast as a $20bn (€16.6bn) undertaking, would probably cost twice that much.

 

Neither pipeline is economic at current cost estimates, Tillerson said, and could not be pursued without massive government subsidies - an unlikely development given monetary and political circumstances in both the US and Canada.

 

Third, Weissman cautions that exploration and production (E&P) plans by oil-rich Middle Eastern countries, particularly Saudi Arabia, remain uncertain more than three years out. 

 

“That means that additional Mideast production, and particularly additional oil output by Saudi Arabia, is uncertain for the out years and likely will not be able keep pace with global demand growth,” Weissman said.

 

In short, Weissman says, within very few years the US and other major industrialised countries could be facing significant oil demand increases that outstrip modest global production gains.  By 2017 or even considerably sooner, oil at $100/bbl might be just a fond memory.

 

Aside from the negative impact that oil at more than $100/bbl would likely have on US and global economies, the price of oil generally affects natural gas prices and consequently could seriously erode the competitive position of US chemicals manufacturers, wholly dependent on natgas as a feedstock.

 

The relationship between oil and natgas prices is complicated, but EIA estimates that every permanent 20% increase in the price of West Texas Intermediate crude, the US benchmark, will trigger a 15% increase in the price of gas within 12 months.

 

However, the outlook is not nearly so dire, according to energy specialist Rehan Rashid of investment firm Friedman Billings Ramsey.

 

Rashid says oil majors have made breakthroughs in deepwater oil drilling - tapping into US Gulf reserves as much as 25,000 feet below the seabed - that could bring an additional 60bn bbl of oil to the US market over the next five-to-10 years.

 

Development of those reserves, he said, could double US Gulf oil production from its current output of around 1.5m bbl/day to some 3m bbl/day by 2017.

 

That additional 1.5m bbl/day of Gulf oil would not have all that much impact on global oil demand that by 2017 is expected to reach 100m bbls/day, Rashid said, but other deepwater developments elsewhere on the globe and advances in a wide range of energy resources also will be coming on stream.

 

“I encourage people to think not just in terms of oil production but in terms of total new Btus [British thermal units] that will be coming into the market over the next 10 years,” Rashid said.

 

He said that in addition to growing Btu contributions from coal, hydro-electric, nuclear and solar energy over the next 10 years, natural gas will achieve major gains.

 

“Over the next five years, we expect about 20bn cubic feet [bcf]/day of additional Btus from LNG [liquefied natural gas] resulting from major investments being made in Qatar, Algeria, Egypt and Norway, plus another 10 bcf/day in piped gas from Russia, Norway and Algeria,” Rashid said.

 

“That is equivalent to about 5m bbl/day of additional oil within the next five years,” he said.

 

Still, even Rashid is not wholly convinced of an energy-adequate future.

 

“The question is,” he said, “will those additional Btus be enough?”

 

By: Joe Kamalick
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