Oil Market Reliance on U.S. Shale Potential Is Risky, IEA Says

(Bloomberg) -- There’s a risk the world is becoming too reliant on the rapid growth of U.S. shale oil, its foremost energy adviser has warned.

Without a raft of new approvals for non-shale projects, oil production from U.S. shale plays must more than triple by 2025, to an eye-popping 15 million barrels a day, to satisfy global demand, according to the International Energy Agency’s latest World Energy Outlook.

That’s as upstream projects, including large deepwater developments and those targeting sandstone reservoirs onshore, have been affected by the industry only just emerging from a worst-in-a-generation slump.

The trouble is, it’s unlikely shale can grow to that extent. Even if producers are able to overcome infrastructure bottlenecks that have muted growth this year, they’d need to invest far more and bring in a higher number of rigs than they did when oil prices peaked at $115 a barrel in 2014.

Oil Market Reliance on U.S. Shale Potential Is Risky, IEA Says

“Against this backdrop, it would appear risky to rely on a tripling of U.S. tight oil production, from today’s level, by 2025,” the agency wrote in its report. “There is a real prospect of damaging price spikes and increased price volatility.”

Oil’s crash has meant that cash-strapped companies have been delaying or canceling projects for years, opening up the risk of an oil-supply shortfall in the next few years.

That would be less of a problem if the world followed the IEA’s “sustainable development scenario,” where aggressive policies targeting carbon emissions slice into demand for fossil fuels. Except the world doesn’t look like it’s headed down that path, and it’s likely that developing economies will drive oil consumption higher through to 2040.

The Paris-based agency estimates about 16 billion barrels of new conventional oil resources needs to be discovered and discovered for development each year between now and 2025 to avoid a “mismatch” between supply and demand. That’s double the current rate of approvals, and even a crude price rally this year hasn’t been enough to greatly increase new project investments.

OPEC can provide a buffer to some extent by increasing its output, but that would only fill “a small portion of the supply-demand gap,” the IEA said. It would also weaken the ability of markets to respond to unexpected disruptions.

Other takeaways from the report include:

  • All of the growth in global oil consumption to 2040 is expected to come from developing economies, with demand for transport in advanced economies expected to fall dramatically because of electric vehicles
  • Oil use in cars overall will peak in the mid-2020s even as the global fleet expands by 80 percent to 2 billion vehicles in 2040
  • Demand will still rise for crude to make diesel and gasoline for trucks as well as for petrochemicals but doubling recycling rates could cut 1.5 million barrels a day from total consumption
  • If the world follows the IEA’s “sustainable development scenarios” refiners may not have enough capacity to meet the demand for lighter petroleum products, increasing the risk of price volatility

©2018 Bloomberg L.P.