This is the first of what will be a very quick succession of articles, in research for the past month, on the oil and gas industry, the situation in the North Sea and the relation of this overall picture to a potentially independent Scotland.
Each article will be linked to others in the series for ready access.
We are publishing these as a series because this is one of the most important, complex, contentious – and fascinating – matters of wide interest, given the ongoing campaigns for independence from the United Kingdom and for the retention and revisioning of that union.
Articles – some short, some longer – will cover:
- The Industry Today
- Europe and Shale Oil
- The North Sea
- The Wood Report
- North Sea Investment
- The UK Refineries
- Grangemouth – the game changer
The purpose of the series is to inform, not to promote any political stance, although there are clear political indicators from the facts of the matter.
The oil industry today
The oil industry had, some time ago, decided that its future, including in the North Sea, was in developing the technology to handle the extraction and refining of the heavy crudes which form much of the remaining conventional reserves.
They had begun investing in technologies to do this – particularly in America’s Gulf Coast, with the Obama administration driving the controversial Keystone XL pipeline designed to carry cheap heavy crudes from the oil sands in Alberta all 1,700 miles from the Canadian border straight to the Texas coastal refineries.
Several of the Gulf Coast’s largest refineries had spent years and billions of dollars preparing their plants to process huge volumes of these crudes but had not got to the stage of returning on that investment when the market changed against all reasonable anticipation.
What is happening in America is now driving a very different and rapidly changing global market for oil and gas products.
America developed horizontal drilling and hydro fracturing – colloquially shortened to ‘fracking’ – and America got cracking, extracting ‘tight oil’ and gas from shales.
The massive American shales – from the current gushers of North Dakota’s Bakken shale and Texas’s own Eagle Ford shale are producing this oil in volumes not seen for decades, to the point where they are literally overwhelming the infrastructure- the pipe networks, the rail cars and the refineries themselves.
The major pipeline networks were directed to the Gulf Coast refineries, with those that had converted to focus mainly on heavy crudes now unable to cope with the volumes of sweet light crude flooding in from Bakken and Eagle Ford.
Now there is political pressure to halt the Keystone XL project – which is surplus to current requirements and, in any case, the Gulf Coast refineries are getting all the cheap Canadian crude they want from the rail car supply line, in the usual form of dilbit [diluted bitumen].
More importantly from the global perspective, there is now a drive to get the shale oils to the west and east coast refineries, which had not converted to focus on heavy crudes and with new refineries and associated petrochemical plants being built at speed.
From the European perspective, the existing and new east coast plants – refineries and petrochemicals – are well placed for shipping out in our direction. Competition.
America has been for some time, like the UK, a net importer of oil and gas – it has been spending $200 billion a year buying foreign oil – but not for much longer. It is already exporting surplus oil to the rest of the world in volume. It has, to date, restricted the export of shale gas LNG [Liquified Natural Gas] to countries with which America does not have a free trade agreement – but the industry is currently lobbying hard to get that restriction removed.
America is predicted to replace Russia as the largest non-OPEC liquids producer by next year – in the second quarter of 2014. And that’s not even counting its biofuels and refinery gains.
And just over a month ago, in October 2013, America handed over to China its position as the world’s biggest oil importer.
Gas and oil prices in the States have plummeted, showing massive discounts on West Texas Intermediate [WTI], the local pricing benchmark linked to the UK’s Brent, which is the worldwide price benchmark.
The sudden availability of cheap energy has kickstarted new investment in heavy industry in America, with a surge in manufacturing – because cheap power keeps production costs low and makes their products super competitive.
All thanks to fracking shales.
It is worth noting that the Organisation of Petroleum Exporting Countries [OPEC], in its 2013 World Oil Outloook [WOO] predicts the tight oil supply to plateau by 2020 and then to decline to 2035. In its ‘Reference Case’ it predicts that decline to be quite steep, although this was not the case in all scenarios considered.
OPEC, and its Middle Eastern members in particular, expects to regain primary importance after 2035 as supplies from outside OPEC falter. OPEC pumps about 40% of global oil supplies.
However, OPEC does see the American shale exports as threatening its own position. Its members have raised about the competition their oil faces from U.S. crudes. For instance, Nigeria, in particular, has seen less demand for its oil – similar in quality to the output from the Bakken.
The twist in the tail of this situation is that it OPEC takes competitive action to force down the price of the American sweet shale oils, the boom in America could be over faster than anyone [other, possibly, than OPEC] is bargaining on.
Ed Hirs, a lecturer in energy economics at the University of Houston, says: ‘If OPEC hopes to maintain any semblance of its cartel pricing power now would be the time for its members to boost their oil output, drive prices down, bankrupt marginal American producers and regain market share for the long-term.
‘In short, if OPEC simply declines to reduce its own production quotas in the face of growing U.S. oil volumes, the American producers could grow themselves right out of the money.’
Note: The photographs above is by Joshua Douken, reproduced here under the Creative Commons licence. It shows ‘Haliburton preparing to frack the Bakken’ – a phrase and an attitude that shouts ‘America’ and ‘the oil industry’.