U.S. Shale Boom Masks Threats to World Oil Supply, IEA Says

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Canadian Oil Sands
The Syncrude Canada Ltd. mine stands in this aerial photograph taken above the Athabasca Oil Sands near Fort McMurray, Alberta, Canada. In the Canadian oil sands, among the most expensive oil deposits in the world to exploit, a slowdown is already evident and the IEA estimates about a quarter of projects are at risk as prices fall. Photographer: Ben Nelms/Bloomberg

The U.S. shale boom masks threats to global oil supply including Middle East turmoil, conflict in Ukraine and the difficulty of unconventional oil production beyond North America, the International Energy Agency said.

“The global energy system is in danger of falling short of the hopes and expectations placed upon it,” the IEA said today in its annual World Energy Outlook. “The short-term picture of a well-supplied oil market should not disguise the challenges that lie ahead as reliance grows on a relatively small number of producers.”

Global oil consumption will rise to 104 million barrels a day in 2040 from 90 million barrels a day in 2013, driven by demand for transport fuel and petrochemicals in developing countries, the report said. To meet that growth and replace exhausted fields will require about $900 billion a year in investment by the 2030s as oil companies develop fields from Canada’s oil sands to the deep waters off Brazil, the IEA said.

Benchmark oil prices in New York have dropped more than 20 percent this year as crude production in the U.S. reached the highest in 40 years, driven by shale fields in North Dakota and Texas. That’s threatening investment in the global industry as companies try to insulate profits from the price fall. While the near-term picture is secure, the development of capital-intensive areas outside North America is at risk, the IEA said.

Oil futures fell as much as 1.1 percent to $77.10 a barrel in New York today.

Energy Trends

The Paris-based IEA advises industrialized nations on energy policy and produces the World Energy Outlook each year, making long-term forecasts on global energy trends. This year’s report, for example, included a section highlighting the rising cost of decommissioning the world’s nuclear aging reactors, expected to total more than $100 billion by 2040.

In the Canadian oil sands, among the most expensive oil deposits in the world to exploit, an investment slowdown is already evident and the IEA estimates about a quarter of projects are at risk as prices fall. Norway’s Statoil ASA and France’s Total SA have delayed projects in the region this year.

Likewise, the complexity and capital intensity of developing Brazil’s deepwater fields could also contribute to a shortfall in investment.

Uncertain Geology

Replicating the U.S. shale oil boom outside of North America will also be a challenge, the report said. A lack of existing oil and gas infrastructure, environmental opposition to fracking, and uncertain geology are among the reasons unconventional drilling hasn’t spread.

Oil companies from Royal Dutch Shell Plc to ConocoPhillips said last month that they would cut capital spending to maintain profitability in the face of lower oil prices.

Threats to new investment stand alongside political risks to oil and gas production. Sanctions that restrict Russia’s access to technologies and capital markets have raised concerns about security of supply from the world’s largest energy exporter, the IEA said.

With Asian countries set to import two out of every three barrels of crude traded internationally by 2040, over-reliance on the Middle East for production growth is a concern, the IEA said. China is set to overtake the U.S. as the world’s biggest oil consumer within two decades, according to the report.

Turbulent Time

Iraq is the biggest risk to the security of oil supply, the report said, contributing to the most turbulent time in the Middle East since the 1970s. While renewed conflict in the north of the country has not yet affected production, it discourages the large-scale capital commitment needed for the next phase of the country’s oil development, the IEA said.

In Iran, there are also few signs of a resolution with the international community necessary for increased output.

While projected output increases in Brazil and Canada, a rise in consumption will raise reliance on the Middle East, raising questions about whether the necessary investment will be made in time to avert a period of tighter markets and higher prices.

The IEA sees total production of crude staying at around 68 million barrels per day until the early 2030s before dropping to 66 million barrels by the end of the period, leaving the task of meeting rising demand entirely to unconventional production and natural gas liquids.

Meanwhile, investment in cleaner forms of energy is being held back by the $550 billion a year that fossil fuels receive in subsidies, the IEA said. Renewables subsidies are about a quarter of that amount.

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