Perth, 26 August 2016 Curtin Corner, JCIPP The Price of Oil: Why it Rose, Why it Fell, and What it Will Mean for Australian LNG Roberto F. Aguilera r.aguilera@curtin.edu.au
Background Shale oil industry <10 years old, still in its infancy Boom has potential to spread globally Several countries well-positioned (e.g. Australia, Argentina, Canada, China, Mexico, Russia) Increased production and downward pressure on oil prices over the long term Implications for Australian LNG?
Price Indices in Constant Money, 1970-72=100 What explains oil s extraordinary price history? Problems with state ownership and resource curse 800 600 400 200 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Oil Metals Sources: UNCTAD and UNSTAD.
US crude oil production, 1900-2015 What explains the price fall? The astonishing rise of shale oil (and disappointing economic growth) mbd 12 10 8 6 4 2 Increase 2008-2015: 89% 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 Source: EIA (annual)
Have we only seen the beginning? Generally, shale has been seen as medium-term phenomenon US oil production forecasts repeatedly revised upwards by EIA mbd 11 10 9 8 7 6 5 2016 2015 2014 2013 2012 2011 4 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Technological progress: Bakken oil production & rig count 1.4 250 1.2 1.0 Production Rig count 200 Production (mbd) 0.8 0.6 0.4 0.2 150 100 50 Rigs - Jan-07 Jul-07 Jan-08 Jul-08 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 - Source: EIA (2016)
Drilling Has technology played out? Operational efficiencies (e.g. # days to drill) Increased pad drilling, multi-lateral drilling Reduced well spacing Longer horizontal laterals Fracking Increased # of stages Optimal spacing of stages Zipper fracking Waterless fracking Re-fracking
Global shale oil resources widely distributed Assessment by EIA (2013): global shale oil resource of ~345 billion barrels 80 75 70 60 50 58 Technically Recoverable Resources (bn bls) Of the total: Russia 22% US 17% China 9% Argentina 8% Libya 8% Australia 6% 40 30 20 10 0 32 27 26 18 13 13 9 9 Source: EIA (2013) Our estimate, calculated with a Variable Shape Distribution Model (VSD), is ~650 billion barrels
Speculative rest of world shale oil impact 2035, mbd Global 2014 oil output Global rise, 20 years (1994-2014) US share of shale oil resources, EIA (2013) US shale production rise, 10 years (2004-2014) ROW shale production rise, 20 years (2015-2035) 88.7 21.6 17% 3.9 19.5 Source: The Price of Oil (2015)
Key considerations for global shale development 1. Developed infrastructure 2. Ownership 3. Drillers 4. Risk capital 5. Supply chains 6. Regulation 7. Environmental impact 8. Public acceptance
Environmental constraints There are indeed environmental problems, though often exaggerated by media Most concerns relate to: Intensive water use Contamination drinking water Methane leakage Induced earthquakes Damage caused by wild west industry, but hazards will be overcome as industry matures and becomes more tightly regulated
Recommendations for unconventional gas/oil development Organizations identified measures to reduce environmental impacts Some regulation in place (including in WA)
Non-US shale oil production costs, 2014 and 2035, $/bl Country/Region 2014 2035 Russia 65 47 Argentina 50 36 China 75 55 North Africa 100 73 Mexico 60 44 Australia 85 62 Colombia 95 69 Brazil 90 66 Cost estimates for 2014 based on IHS (2014), they comprise a 10% rate of return on invested capital; Costs in 2035, estimated in The Price of Oil (2015), assume technological progress (i.e. cost reductions) of 1.5% per annum. Total costs around $60/bl in 2035, so price cannot fall below that level for global revolutions to succeed
14 Price implications: Successful global revolution will put significant downward pressure on global oil price Sufficient amounts of oil available in 2035 at total costs not exceeding $40-60/bl Thus, $40-60 price adequate to support almost any conceivable level of demand Ample supply additions at this level assure that price settles at $40-60 in the long term Winners and losers, but on balance, a great advantage
Natural gas prices: divergence significantly narrowed 21 18 15 $/million Btu 12 9 6 3 0 Jul-16 Jan-16 Jul-15 Jan-15 Jul-14 Jan-14 Jul-13 Jan-13 Jul-12 Jan-12 Jul-11 Jan-11 Jul-10 Jan-10 Jul-09 Jan-09 US (Henry Hub spot) German border Japan LNG UK (NBP spot) LNG Asia (FOB) Source: IMF, Platts (2016)
Spot and short-term trade vs. total LNG trade Source: GIIGNL(2016) Low oil prices will keep oil-indexed LNG prices low Gas-on-gas pricing will rise with growing global LNG trade 16
LNG Exports in 2015, mtpa 0.3 1.5 3.7 3.8 4.2 5.6 6.6 United States Yemen 7.0 Peru 77.8 7.8 Equatorial Ginea Norway 10.9 United Arab Emirates Brunei Papua New Guinea 12.1 Oman Russia 12.5 Algeria Trinidad Indonesia 16.1 Nigeria Malaysia 29.4 Australia Source: International Gas Union (2016) 25.0 20.4 Qatar
18 Australia: $200 billion investment in LNG projects By end of decade, Australia will export 85 mtpa of LNG, making it world s largest exporter Contribute to already existing supply glut Proximity to Asia, resulting in lower shipping costs, makes region ideal destination for exports Source: APPEA (2016)
19 In low price environment, LNG sellers striving to bring project costs down Improved productivity and operational efficiencies are seen as vital Better early-stage planning, standardisation of equipment, simplifying construction, and flexible technologies like FLNG Source: Shell On the consumption side, floating import infrastructure enables poorer countries to increase their natural gas consumption
Concluding thoughts Despite low prices and current oversupply, gas/lng long-term fundamentals remain attractive, especially in Asia
World primary energy mix (1850-2035) 1 Fraction of total energy market 0.8 0.6 0.4 0.2 Wood Hydro Coal Gas Other Ren. Oil Nuclear 0 1850 1875 1900 1925 1950 1975 2000 2025 Year Source: The Price of Oil (2015)
Concluding thoughts Despite low prices and current oversupply, gas/lng long-term fundamentals remain attractive, especially in Asia Australia to remain competitive, but cost reduction important Low oil and gas prices ahead
The Price of Oil Why it rose stupendously over the past 40 years Why it is likely to fall substantially in the coming decades What it will mean for the world economy, politics and the environment Published late-2015, Cambridge University Press
Perth, 26 August 2016 Curtin Corner, JCIPP The Price of Oil: Why it Rose, Why it Fell, and What it Will Mean for Australian LNG THANK YOU r.aguilera@curtin.edu.au