Shale oil – the next big thing?

February 14, 2013

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By John Hawksworth, Chief Economist, and Adam Lyons, Oil and Gas Director

Shale oil is rapidly emerging as a significant and relatively low cost new unconventional resource in the US. And it has the potential to spread globally over the next couple of decades.  If this happens, it could revolutionise global energy markets, providing greater long term energy security at lower cost for many countries. But it would also pose some important challenges for both governments and companies.

Our new report suggests that global shale oil production has the potential to reach up to 14 million barrels of oil per day by 2035; this would amount to around 12% of the world’s total projected oil supply at that date.

Without shale oil, rapidly increasing demand from fast growing emerging economies – as highlighted in our recent World in 2050 report – will push up real oil prices significantly in the long run – to around $133 per barrel in 2035 according to the EIA. With shale oil, however, we estimate that real oil prices in 2035 could be around 25%-40% lower than this at only around $83-$100/barrel in real terms.

We estimate that lower than currently forecast oil prices could increase the level of global GDP in 2035 by around 2.3%-3.7% - equivalent to around $1.7 -$2.7 trillion at today’s values.

However, the benefits of such oil price reductions will vary significantly by country. Large net oil importers such as India and Japan might see their GDP boosted by around 4%-7% by 2035, while the US, China and the Eurozone might gain by around 3%-5% of GDP.  The UK, as it is still an oil and gas producer albeit a declining one, might gain somewhat more modestly by around 2-3% of GDP.

Conversely, major oil exporters such as Russia and the Middle East could see a significant worsening of their trade balances in the long run if they fail to develop their own shale oil resources. There could also be significant geopolitical effects as the US becomes more energy independent and so less focused on Middle Eastern affairs. The influence of OPEC in setting oil prices could decline over time as its share of global production falls.

The potential emergence of shale oil (like shale gas before it) presents major strategic opportunities and challenges for the oil and gas industry all the way along the value chain.  Oil producers, for example, will have carefully to assess their current portfolios and planned projects against lower real oil price scenarios.

National and international oil producers will also need to review their business models and skills in light of the very different demands of producing shale oil onshore rather than developing complex “frontier” projects on which most operations and new investment is currently focused.

Lower than expected oil prices would also create long-term benefits for a wide range of businesses which use oil or oil-related products as inputs (e.g. petrochemicals and plastics, airlines, road hauliers, automotive manufacturers and heavy industry more generally). There will also be important knock-on effects on gas prices given that these are often linked at least in part to oil prices.

The potential environmental consequences of an increase in shale oil production are complex.  At the local level, government regulation will be critical to the speed of development, but needs to be sensitive to local environmental concerns. At the global level, shale oil could have adverse environmental effects by making alternative lower carbon transport fuels less attractive, but might also displace production from higher cost and more environmentally sensitive areas such as the Arctic and Canadian tar sands.

In summary, shale oil is a big issue that governments and companies need to start thinking about now.

John Hawksworth:
Read profile | Contact by email | Tel: 020 7213 1650

Adam Lyons:
Read profile | Contact by email | Tel: 020 7804 3175