The next energy revolution
Shale oil production has been accelerating in US, growing from 111,000 barrels per day in 2004 to 553,000 barrels per day in 2011 (equivalent to a growth rate of around 26% per year). As a result, US oil imports are forecast this year to fall to their lowest levels for over 25 years.
• Estimates by the US Energy Information Administration (EIA) suggest that shale oil production in the US will rise more slowly in the future to around 1.2 million barrels per day by 20351 (equivalent to 12% of projected US production at that date). However, these projections seem conservative relative to other market analysts who forecast US shale oil production of up to 3-4 million barrels per day by that date.
• EIA estimates of the scale of total shale oil resources in the US have been revised upwards from 4 billion barrels in 2007 to 33 billion barrels in 2010, providing a significant contribution to increased US energy independence.
Shale oil could make the largest single contribution to total US oil production growth by 2020, with the proportion of production from conventional sources remaining relatively stable.
• In the long term, we estimate that shale oil could displace around 35-40% of waterborne crude oil imports to the US. This would create additional effective supply to other locations such as China. However, should China start to exploit its own shale oil resources(as discussed further below) this would further decrease its import dependency and increase effective supply to oil importing countries.
• Rapid production growth in shale oil is having dramatic local effects on pricing in areas where shale oil is produced but access to export infrastructure is limited. The US domestic oil price has already decoupled from global indices and imports are forecast to decline. Put simply, increased shale oil production could lead to oil prices that are significantly lower than projected in current forecasts.
Outside the US, the development of shale oil is still at an early stage. However, there are indications that point to large amounts of technically recoverable resources distributed globally.
• Global shale oil resources are estimated at between 330 billion and 1,465 billion barrels.
Investment is already underway to characterise, quantify and develop shale oil resources outside the US, for example, in Argentina, Russia and China.
• Since the beginning of 2012, there have been a number of announcements, from Argentina to New Zealand, of discoveries of shale oil resources as well as government initiatives to encourage the exploration and production of shale oil.
• We have developed scenarios that consider the potential impact of future growth in shale oil production on oil prices. We have then assessed how oil price changes of this magnitude could impact the wider economy up to 2035 at both global and national levels using a macroeconomic model.
• These long-term projections are subject to many uncertainties and are conditioned on a number of key assumptions as summarised in Box 1. The specific figures quoted for different scenarios should therefore be interpreted as being indicative of broad orders of magnitude rather than being precise numerical forecasts.
• The remainder of this paper summarises the key results of this research and outlines the potential implications for companies and governments.
Recent forecasts from the EIA and the International Energy Agency (IEA) suggest a marked rise in both global oil production and real oil prices over the period to 2035, due in particular to rising demand from China, India and other fast-growing emerging economies6. The IEA forecasts a 19% increase in global oil production by 2035, as compared to a 28% increase forecast by the EIA7 (which is not that large a difference given the uncertainties involved in any such
long-term projections).
The EIA and IEA’s average global oil price predictions are even more closely aligned, with the IEA predicting a sharp short-term increase that gradually flattens off in the longer term to $127 per barrel by 2035 and the EIA predicting a steadier price increase to reach $133 per barrel by 2035 (both estimates are expressed in real terms adjusted for general US price inflation, which is also the case for all other oil price projections quoted in this report).
In deriving these oil price projections, both agencies assume relatively modest growth in shale oil as a proportion of total global production.
Their projections in this respect are arguably conservative as they are based only on resources about which there is already a high degree of certainty. Past experience of shale oil and shale gas suggests that these resource estimates are likely to be revised upwards significantly over time as activity to new plays in the US and globally.
Extrapolating from the available data (and drawing parallels with US shale gas experience) has enabled us to generate a number of scenarios which see shale oil production ramping up both in the US and around the globe. As shown in Chart 3, this analysis suggests that global shale oil production has the potential to rise to up to 14 million barrels of oil per day by 2035 in our main scenario, amounting to 12% of total oil supply at that date (using EIA projections for production other than shale oil).
We have developed two core oil price scenarios based on this shale oil production outlook:
• The first scenario (the ‘PwC reference case’) allows for OPEC to respond to increases in shale oil production and consequent lower oil prices by limiting its own production to maintain an average price of around $100 dollars per barrel (in real terms). This supply scenario results in OPEC losing some market share, although OPEC member states continue to increase total production in absolute terms to meet rising demand.
• The second scenario (the ‘PwC low case’) does not include an OPEC response, so the increased overall oil supply results in a greater impact on oil prices, which fall by 2035 to around $83 per barrel in real terms.
In both these scenarios, our model suggests a global real oil price that is significantly lower than the EIA reference case projections of around $133 per barrel in 2035 - by around 25% in our reference case, and by around 40% in our low case (see Chart 5). This corresponds to a real oil price fall of around $33-50 per barrel by 2035 compared to the EIA baseline projection. In our scenarios, the oil price falls by proportionately much more than the rise in oil supply. This reflects the well documented empirical finding that oil demand is relatively insensitive to price changes, based on estimates of long-term price elasticities in our model drawn from past academic studies.
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