May 15th, 2013
Econintersect: The title of the press release from the International Energy Agency (IEA): "Supply shock from North American oil rippling through global markets". This press release (available below) announced the release of the annual Medium Term Oil Market Report for 2013. The report infers that the rapid expansion of North American oil and gas production will have as much of an impact on global markets as did the ascendancy of China as a major consumer for oil and gas over the last 15 years. Of course, the influence on stress and price movement in the market will be exactly in the opposite direction.
The North American increased production will come at a time when some other geographic areas are experiencing production stress so part of the "bubble" will be offset by less expansion and some contractions elsewhere.
Some of the graphics from the report:
Demand growth over the next five years will be entirely in the non-OECD countries.
Non-OPEC countries will grow production 2.5-times as much as OPEC.
Note: Light tight oil is contained in petroleum-bearing formations of low permeability, often shale or tight sandstone (Wikipedia). Several such large deposits are found in the U.S. and Canada, the most famous being the Bakken shale of the northern Great Plains.
The North American growth bubble peaks in 2012-2013 and then is projected to grow a slower steady rate through 2018.
OPEC oil production capacity growth is projected to be contracting by 2018.
North America is projected to see a 39% decline in crude oil imports from 2012 (5.6 million barrels per day) to 2018 (3.4 million barrels per day).
Maria van der Hoeven of the IEA included the following in her remarks delivered with the release of the report:
North American supply is an even bigger deal than we thought. A real “game changer” in every way – not just because of the volumetric growth involved, but for a host of compounding reasons. Sure, North American supply growth now looks higher than expected in both absolute and relative terms. A country that 150 years ago served as the cradle of the oil industry, but which for decades seemed to face an irreversible production decline, now finds itself, all of the sudden, at the centre of an oil boom. That is remarkable in itself. But supply growth is only part of the story. There are many factors that will compound the impact of this new American supply: crude quality, infrastructure requirements, current regulations, and the potential for replication elsewhere, to name a few. And the technologies which drive the boom will increase production from more mature fields, shifting some investment from more risky “frontier” regions. Altogether, these factors are forcing a series of chain reactions that will leave very few links in the global oil supply chain unaffected. That is my first point.
American supply growth now looks higher than expected in both absolute and relative terms. A country that 150 years ago served as the cradle of the oil industry, but which for decades seemed to face an irreversible production decline, now finds itself, all of the sudden, at the centre of an oil boom. That is remarkable in itself. But supply growth is only part of the story. There are many factors that will compound the impact of this new American supply: crude quality, infrastructure requirements, current regulations, and the potential for replication elsewhere, to name a few. And the technologies which drive the boom will increase production from more mature fields, shifting some investment from more risky “frontier” regions. Altogether, these factors are forcing a series of chain reactions that will leave very few links in the global oil supply chain unaffected. That is my second point.
My third point is that the next five years will consolidate the rise of the non‐OECD in virtually every aspect of the oil market, and most of the growth (though by no means all of it) will come from East‐of‐Suez economies. The idea that the emerging market and developing economies would eventually overtake the OECD in oil demand is nothing new. Now this is actually happening, however. It is happening fast. Faster than expected. Since the last MTOMR, the two‐speed economic recovery has become a three‐speed recovery.
- Non‐OECD economies continue to outperform the OECD, but within the latter, a bifurcation has appeared between a North America energised by cheap natural gas and a euro area plagued by debt issues.
- Oil demand growth, however, remains two‐speed. Improvements in the US economy have yet to be matched with a corresponding rebound in oil demand. US efficiency is on the rise, and natural gas is making inroads into the oil market. There is a growing perception that the peak in OECD oil demand, including in the US, is behind us…
- …whereas non‐OECD demand growth is spreading from China, which appears to be slowing down somewhat, to other Asian economies and even Africa, which is emerging as a new demand frontier.
This rise of non‐OECD demand is pregnant with consequences for the market as a whole. The MTOMR singles out two related developments for particular scrutiny: the continued shift in global refining towards the non‐OECD economies, and associated developments in global storage capacity. Non‐OECD economies are looming large on both counts. Their rise has global consequences.
One of the consequences of those changes is that the global product supply chain is transforming. That will be my last point. New non‐OECD mega‐refineries are challenging OECD refining economics, at least beyond the US. Their expanding reach is accelerating the globalisation of the product market. With it come the benefit of greater market flexibility in the dispatch of product supply, but also longer supply chains, higher reliance on stocks to meet demand, diminished visibility in inventory levels, increased disruption risks, reduced market transparency and, possibly, greater price variation between key markets, and also between seasonal peak and troughs in demand.
Here is the complete press release from the IEA:
14 May 2013
The supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15, the International Energy Agency (IEA) said in its annual Medium-Term Oil Market Report (MTOMR) released today. The shift will not only cause oil companies to overhaul their global investment strategies, but also reshape the way oil is transported, stored and refined.
According to the MTOMR, the effects of continued growth in North American supply – led by US light, tight oil (LTO) and Canadian oil sands – will cascade through the global oil market. Although shale oil development outside North America may not be a large-scale reality during the report’s five-year timeframe, the technologies responsible for the boom will increase production from mature, conventional fields – causing companies to reconsider investments in higher-risk areas.
In virtually every other aspect of the market, developing economies are in the driver’s seat. This quarter, for the first time, non-OECD economies will overtake OECD nations in oil demand. At the same time, massive refinery capacity increases in non-OECD economies are accelerating a broad restructuring of the global refining industry and oil trading patterns. European refiners will see no let-up from the squeeze caused by increasing US product exports and the new Asian and Middle Eastern refining titans.
“North America has set off a supply shock that is sending ripples throughout the world,” said IEA Executive Director Maria van der Hoeven, who launched the report at the Platts Crude Oil Summit in London. “The good news is that this is helping to ease a market that was relatively tight for several years. The technology that unlocked the bonanza in places like North Dakota can and will be applied elsewhere, potentially leading to a broad reassessment of reserves. But as companies rethink their strategies, and as emerging economies become the leading players in the refining and demand sectors, not everyone will be a winner.”
While geopolitical risks abound, market fundamentals suggest a more comfortable global oil supply/demand balance over the next five years. The MTOMR forecasts North American supply to grow by 3.9 million barrels per day (mb/d) from 2012 to 2018, or nearly two-thirds of total forecast non-OPEC supply growth of 6 mb/d. World liquid production capacity is expected to grow by 8.4 mb/d – significantly faster than demand – which is projected to expand by 6.9 mb/d. Global refining capacity will post even steeper growth, surging by 9.5 mb/d, led by China and the Middle East.
The growth in North American oil production presents opportunities and challenges, notes the MTOMR. With large-scale North American crude imports tapering off and with excess US refining output looking for markets, the domino effects from this new supply will continue. Having helped offset record supply disruptions in 2012, North American supply is expected to continue to compensate for declines and delays elsewhere, but only if necessary infrastructure is put in place. Failing that, bottlenecks could pressure prices lower and slow development.
While OPEC oil will remain a key part of the oil mix, OPEC production capacity growth will be adversely affected by growing insecurity in North and Sub-Saharan Africa. OPEC capacity is expected to gain 1.75 mb/d to 36.75 mb/d, about 750 kb/d less than forecast in the 2012 MTOMR. Iraq, Saudi Arabia and the UAE will lead the growth, but OPEC’s lower-than-expected aggregate additions to global capacity will boost the relative share of North America.
Rising non-OECD participation in the oil market will be associated with continued growth in commercial and strategic storage capacity, along with strategically located storage hubs to support long-haul crude and product trade. African economies will play a larger role in the global market than previously expected. Although data leave room for improvement, there is strong evidence that African oil demand has been routinely underestimated, and may grow by a further 1 mb/d over the next five years.
Finally, steep growth in non-OECD refining capacity will accelerate the transformation of the global product supply chain, exerting downward pressure on refining margins and utilisation rates and leaving OECD refineries at risk of closure, notably in Europe. Product supply chains will continue to lengthen as new merchant refining centres extend their reach, resulting in higher disruption risks and potentially more volatile markets in product-importing economies.
For an overview of the Medium Term Oil Market Report-2013, please click here.
To see the slides presented at the report’s launch, please click here.
To read IEA Executive Director Maria van der Hoeven's remarks at the launch, please click here.
To hear the news conference for the launch of the Medium Term Oil Market Report-2013, please click here.
The MTOMR is part of a series of medium-term forecasts that the IEA devotes to each of the main primary energy sources – oil, gas, coal and renewable energy – and, starting this year, energy efficiency. A companion to the IEA’s monthly Oil Market Report, it offers a bridge between that snapshot of market conditions and the longer-term World Energy Outlook.
The Medium Term Oil Market Report-2013 is on sale at the IEA bookshop. Accredited journalists who would like more information or who wish to receive a complimentary copy should contact email@example.com.
About the IEA
The International Energy Agency is an autonomous organisation which works to ensure reliable, affordable and clean energy for its 28 member countries and beyond. Founded in response to the 1973/4 oil crisis, the IEA’s initial role was to help countries co-ordinate a collective response to major disruptions in oil supply through the release of emergency oil stocks to the markets. While this continues to be a key aspect of its work, the IEA has evolved and expanded. It is at the heart of global dialogue on energy, providing reliable and unbiased research, statistics, analysis and recommendations.
- Launch of the Medium‐Term Oil Market Report 2013 (Maria van der Hoeven, IEA)
- Supply shock from North American oil rippling through global markets (Press release, IEA, 14 May 2013)