Oil: The Next Revolution

The unprecedented upsurge of global oil production capacity

We are not running out of oil anytime soon. Contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption leading to a glut of overproduction and a dip in oil prices.

Based on original, bottom-up, field-by-field analysis of most oil exploration and development projects in the world, an unrestricted, additional production of more than 49 mbd is targeted for 2020, the equivalent of more than half the current world production capacity of 93 mbd.

After adjusting for risk actors, depletion rates, and reserve growth, the net additional production capacity by 2020 could be 17.6 mbd yielding a world production capacity of 110.6 mbd by 2020, the most significant increase in any decade since the 1980s.

The economic prerequisite for this new production to develop is a long-term price of oil of $70 per barrel. Indeed, at current costs, less than 20 percent of the new production does not seem profitable at prices lower than this level.

This oil revival is spurred by an unparalleled investment cycle that started in 2003 and has reached its climax from 2010 on, with three-year investments in oil and gas exploration and production of more than $1.5 trillion.

The production growth will occur everywhere, bringing about also a “de-conventionalization” of oil supplies. During the next decades, this will produce an expanding amount of what we define today as “unconventional oils”, such as U.S. shale/tight oils, Canadian tar sands, Venezuela’s extra-heavy oils, and Brazil’s pre-salt oils.

The four countries that show the highest potential in terms of effective production capacity growth are, in order, Iraq, the U.S., Canada, and Brazil.

The most surprising factor of the global picture, however, is the explosion of the U.S. oil output. Thanks to the technological revolution brought about by the combined use of horizontal drilling and hydraulic fracturing, the U.S. is now exploiting its huge and virtually untouched shale and tight oil fields, whose production – although still in its infancy – is already skyrocketing in North Dakota and Texas. The U.S. shale/tight oil could be a paradigm-shifter for the oil world, by allowing not only for the development of the world’s still virgin shale/tight oil formations, but also for recovering more oil from conventional, established oilfields – whose average recovery rate is no higher than 35 percent.

The natural endowment of the initial American shale play, Bakken/Three Forks (a tight oil formation) in North Dakota and Montana, could become a big Persian Gulf producing country within the United States. But the country has more than twenty big shale oil formations, especially the Eagle Ford Shale, where the recent boom is revealing a hydrocarbon endowment comparable to that of the Bakken Shale.

Most of U.S. shale and tight oil are profitable at a price of oil (WTI) ranging from $50 to $65 per barrel, thus making them sufficiently resilient to a significant downturn of oil prices.