Roberto Aguilera
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The document summarizes a presentation on the past, present, and future of oil prices. It explains that oil prices rose extraordinarily since 1970 due to above-ground hurdles limiting supply expansion. Recent price declines are attributed to slowing global growth and rising shale oil production. Technological advances may allow shale and other sources to continue growing, keeping supply abundant and prices in the range of $40-60 per barrel long-term.
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Roberto Aguilera
- 1. Primary funding is provided by The SPE Foundation through member donations and a contribution from Offshore Europe The Society is grateful to those companies that allow their professionals to serve as lecturers Additional support provided by AIME Society of Petroleum Engineers Distinguished Lecturer Program www.spe.org/dl
- 2. Society of Petroleum Engineers Distinguished Lecturer Program www.spe.org/dl 2 Roberto F. Aguilera Curtin University Australia The Exceptional Price Performance of Oil – Explanations and Prospects
- 3. 3 Outline • Oil price performance – Explanations for extraordinary rise of past decades • Recent market developments: why the price fell – Shale oil supply, technology developments • Long‐term outlook – Projections for production, costs and prices
- 4. 4 Background issues and questions • Price hovered ~ $50/barrel over past few years – Low prices driven by forces of supply & demand • Can shale (and conventional) oil remain economic at current market prices? • Can the shale boom spread globally? • Are lower prices the new normal?
- 5. 5 Past oil price developments • What explains oil’s extraordinary price rise since 1970? – Not financial speculation, nor rapid consumption – Not OPEC production cuts, nor depletion 0 100 200 300 400 500 600 700 800 900 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Oil Metals+minerals *UN's Manufactured Unit Value Index (MUV) in US$ used as deflator Sources: UNCTAD, UNSTAT and IMF online Real prices* of oil and metals+minerals. Index, 1970‐72=100 759% rise, 1970‐2014 38% rise, 1970‐2014
- 6. 6 Past oil price developments • What explains oil’s extraordinary price rise since 1970? – Above‐ground hurdles leading to sluggish capacity expansion • Excessive fiscal burdens • “Resource curse” events 0 100 200 300 400 500 600 700 800 900 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Oil Metals+minerals *UN's Manufactured Unit Value Index (MUV) in US$ used as deflator Sources: UNCTAD, UNSTAT and IMF online Real prices* of oil and metals+minerals. Index, 1970‐72=100 759% rise, 1970‐2014 38% rise, 1970‐2014
- 7. 7 Recent price developments • What explains the oil price fall of 2014? – Disappointing global economic growth leading to moderate demand growth – Rapid rise of shale oil 0 20 40 60 80 100 120 0 2 4 6 8 10 12 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 $/barrel Source: Energy Information Administration (EIA, annual). Million barrels/day US crude oil production Oil price
- 9. 9 Short‐term price prospects • Upside – Robust GDP growth – Supply disruptions • Downside – Trade disputes – Shale & other supply growth 42 47 52 57 62 67 72 77 82 87 $/barrel Source: EIA Statistics Brent oil price
- 10. 10 Supply boom: just getting started? • Forecasts repeatedly revised upwards – Pessimistic projections common but surprising (reserves ↑, produc vity ↑, costs ↓) 88 90 92 94 96 98 100 102 104 2015 2020 2025 2030 2035 2040 Million barrels/day Source: IEA World Energy Outlook (editions 2011 to 2018) World crude oil production forecasts 2018 2017 2016 2015 2014 2013 2012 2011
- 12. 12 Is technology progress exhausted? • Drilling – Operational efficiency (e.g. # days to drill) – Increased pad and multi‐lateral drilling – Reduced well spacing, longer laterals • Hydraulic fracturing – Increased # of stages, optimal spacing – Re‐fracturing – Waterless fracturing – Enhanced Oil Recovery (EOR) Foster S-Curve for shale technology Source: Aguilera et al (2014) • Digitalization & automation
- 13. 13 Will the revolution spread internationally? • Shale boom has potential to spread – Several countries well‐positioned (e.g. Canada, Argentina, Australia, China, Mexico, Russia) – Slower pace than US • Result would be increased production and downward pressure on oil prices
- 14. 14 Global shale resources widely distributed • Shale oil resource ~ 420 billion barrels • Some important regions excluded • Of the total: – United States, 19% – Russia, 18% – China, 8% – Argentina, 6% – Libya, 6% Shale oil technically recoverable resources Source: EIA, Advanced Resources International (2015) 0 10 20 30 40 50 60 70 80 78 75 32 27 26 23 16 16 13 13 Billion barrels
- 15. 15 Global shale resources widely distributed • Shale gas resource ~ 7577 trillion cubic feet • Some important regions excluded • Of the total: – China, 15% – Argentina, 11% – Algeria, 9% – United States, 8% – Canada, 8% Source: EIA, Advanced Resources International (2015) 0 200 400 600 800 1000 1200 1115 802 707 623 573 545 429 390 285 245 Trillion cubic feet Shale gas technically recoverable resources
- 16. Key considerations for global shale development 1. Geology 2. Infrastructure 3. Ownership 4. Drilling rigs 5. Technical progress (e.g. to mitigate steep decline rates) 6. Risk capital 7. Regulation 8. Environmental impact 9. Public acceptance 16
- 17. 17 Environmental impacts • Most concerns relate to hydraulic fracturing: – Intensive water use – Water contamination – Methane leakage – Induced seismicity • There are indeed environmental risks from extraction methods, though often exaggerated by media • Damage caused by infant industry, but hazards will be overcome as industry matures
- 18. 18 Speculative exercise: rest of world shale oil impact in 2035 (mb/d) • Assume rest of world exploits its share by 2035 as successfully as US did in 10 years • Theoretically, yields 19.5 million barrels/day by 2035 (similar to global oil production rise over past 20 years) Global 2018 oil output Global rise, 20 years (1998‐2018) US share of shale oil resources, EIA US shale production rise, 10 years (2004‐2014) Rest of World shale production rise, (2035) 94.8 21.7 19% 3.9 19.5 Source: British Petroleum (annual), The Price of Oil (2015)
- 19. 19 Non‐US shale oil production costs, 2014 and 2035, $/barrel • Costs average $60/barrel in 2035 • Thus, price cannot fall below that level for global shale expansion to succeed • In optimistic case, costs average $40/barrel in 2035 COUNTRY/REGION 2014 2035 (at 1.5% ↓ per year) 2035 (at 3.0% ↓ per year) Canada 45 33 24 Russia 65 47 34 Argentina 50 36 26 China 75 55 40 North Africa 100 73 53 Mexico 60 44 32 Australia 85 62 45 Colombia 95 69 50 Brazil 90 66 47 Cost estimates for 2014 based on IHS (2014). Costs in 2035, estimated in The Price of Oil (2015), assume technological progress (i.e. cost reductions) of 1.5% and 3.0% per annum.
- 20. 20 Speculative exercise: conventional oil revolution in 2035 (mb/d) • Application of shale technologies to conventional oil theoretically yields additional 19.7 million barrels/day Global 2018 oil output Global rise, 20 years (1998‐2018) US share of oil reserves, BP US conventional oil production rise, 8 years (2008‐2016) Rest of World conventional oil production rise, (2035) 94.8 21.7 2.6% 0.5 19.7 Source: British Petroleum (annual), The Price of Oil (2015)
- 22. 22 Price implications • Successful global shale & conventional oil expansion puts significant downward pressure on price • Sufficient amounts of oil available in 2035 at total costs not exceeding $40‐60/barrel – Thus, $40‐60 price adequate to support any conceivable level of demand • Ample supply additions at this level assure that price settles at $40‐60 in long term SP1 P3 Price QuantityQ3 Q1 D3 D1 D2 Q2 P2 Ample supply available at ~$40‐60 Thus, shifts in demand have little price impact
- 23. 23 Oil demand prospects • Wide range of views on future pace of demand growth • Slowing consumption due to oil‐ saving technology and climate stabilization efforts could suppress price somewhat • So far, no large‐scale substitute for oil in transport • Low price gives oil competitive advantage vs alternatives
- 24. 24 World primary energy mix (1850‐2035) • Low prices will extend the use of oil & gas over a longer period of time 0 0.2 0.4 0.6 0.8 1 1850 1875 1900 1925 1950 1975 2000 2025 Fractionoftotalenergymarket Year Oil Gas Coal Wood Nuclear Hydro Other Ren. Source: Based on Aguilera and Aguilera (2008, 2018)
- 25. 2525 Natural gas price developments • Regional prices diverged as shale gas supply & oil price rose • Divergence has narrowed with lower oil price & expanding global gas trade Source: IMF, Cedigaz 0 3 6 9 12 15 18 21 Jan‐09 Jul‐09 Jan‐10 Jul‐10 Jan‐11 Jul‐11 Jan‐12 Jul‐12 Jan‐13 Jul‐13 Jan‐14 Jul‐14 Jan‐15 Jul‐15 Jan‐16 Jul‐16 Jan‐17 Jul‐17 Jan‐18 Jul‐18 Jan‐19 Jul‐19 $/million Btu US (Henry Hub spot) German border Japan LNG UK (NBP spot) LNG Asia (FOB)
- 26. 26 • Improved productivity and operational efficiencies • Better planning, cooperation, standardisation, simple construction, and floating LNG In low price environment, LNG sellers bringing project costs down • On consumption side, floating infrastructure enables poorer countries to increase gas consumption
- 27. 27 Conclusions • Despite past experience, oil price turning point has been reached • Oil prices unlikely to prevail above production costs of new supplies • Innovation will allow for economic production in spite of low prices • Oil and gas will play important role in satisfying long‐ term energy demand
- 28. 28 References • Aguilera RF (2014), “Production Costs of Global Conventional and Unconventional Petroleum”, Energy Policy, Vol 64, pp 134‐140. • Aguilera RF and R Aguilera (2008), “Assessing the Past, Present, and Near Future of the Global Energy Market”, SPE Journal of Petroleum Technology, May. Presented as SPE110215 at the 2007 SPE Annual Technical Conference and Exhibition held in Anaheim, California, U.S.A., 11–14 November 2007. • Aguilera RF and R Aguilera (2018), “Revisiting the long‐run energy mix with the global energy market model (GEM)”, Mineral Economics, Vol 31, pp 221‐227. • Aguilera RF and M Radetzki (2015), The Price of Oil, Cambridge University Press, Cambridge, UK. • Aguilera RF, Ripple RD and R Aguilera (2014), “Link Between Endowments, Economics and Environment in Conventional and Unconventional Gas Reservoirs,” Fuel, Vol 126, pp 224‐238. • BP (annual), BP Statistical Review of World Energy, British Petroleum, London. • EIA (annual), Annual Energy Outlook, Energy Information Administration, Washington DC. • EIA (2015), World Shale Resource Assessments, Energy Information Administration, Washington DC. • EIA (2017), Drilling Productivity Report, Energy Information Administration, Washington DC. • IHS (2014c), “Going Global: Tight Oil Production. Leaping out of North America and onto the World Stage,” Webster J, IHS Energy. • IMF (2017), Primary Commodity Prices, International Monetary Fund, Washington DC. • UNCTAD, UNCTAD Stat, United Nations Conference on Trade and Development, Geneva. • UNSTATS, National Accounts Main Aggregates Database, United Nations Statistics Division, New York.
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