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Harvard Kennedy School researcher forecasts sharp increase in world oil production capacity and risk of price collapse
27 June 2012
|World oil production capacity to 2020 (crude oil and NGLs, excluding biofuels). Source: Maugeri 2012. Click to enlarge.|
Oil production capacity is surging in the United States and several other countries at such a fast pace that global oil output capacity could grow by nearly 20% from the current 93 million barrels per day to 110.6 mbpd by 2020, according to a new study by a researcher at the Harvard Kennedy School. Such an increase in capacity could prompt a plunge or even a collapse in oil prices, he suggests.
The findings by Leonardo Maugeri, a former senior executive vice president of the oil company Eni, and now a fellow in the Geopolitics of Energy Project in the Kennedy School’s Belfer Center for Science and International Affairs, are based on an original field-by-field analysis of the world’s major oil formations and exploration projects.
Contrary to some predictions that world oil production has peaked or will soon do so, Maugeri’s projections forecast the biggest jump in any decade since the 1980s.
This increase represents less than 40% of the new oil production under development globally: more than 60% of the new production will likely reach the market after 2020, according to Maugeri.
Maugeri’s analysis finds that the gross additional production from current exploration and development projects in the world could produce an additional 49 million barrels per day by 2020, an increase equivalent to more than half the world’s current 93 million bpd. After adjusting that gross output increase for political and technical risk factors as well as the offsetting depletion rates of current fields, the analysis projects the net increase by 2020 to be about 17.5 bpd.
|“The shale/tight oil boom in the United States is not a temporary bubble, but the most important revolution in the oil sector in decades. It will probably trigger worldwide emulation over the next decades that might bear surprising results—given the fact that most shale/tight oil resources in the world are still unknown and untapped.”|
The four countries that show the highest potential in terms of effective production capacity growth are—in order—Iraq, the United States, Canada, and Brazil. Much of this increased capacity comes from “unconventional sources” such as US shale/tight oils, Canadian oil sands, Venezuela’s extra-heavy oils, and Brazil’s pre-salt oils. Only four of the current major oil producing countries (more than 1 mbpd of production capacity) face a net reduction of their production capacity by 2020: Norway, the United Kingdom, Mexico, and Iran. In Iran and Mexico, the loss of production is primarily due to political factors. All other producers are capable of increasing or preserving their production capacity, according to Maugeri.
The most dramatic increases involve the exploitation of unconventional oils in the United States, Maugeri says. The extraction technologies are not new, but the combination of technologies used to exploit shale and tight oils has evolved. The technology can also be used to reopen and recover more oil from conventional, established oilfields.
Taking into consideration limitation in transportation infrastructure and refining capacity, and environmental barriers to development, the United States could still increase oil production by 3.5 million barrels per day and conceivably produce a total of 11.6 mbpd of crude oil and natural gas liquids per year by 2020, making it the second largest oil producer in the world, after Saudi Arabia, according to Maugeri.
The Bakken and Three Forks fields in North Dakota and Montana alone could become the equivalent of a Persian Gulf-producing country within the United States. The Bakken formation’s output has grown from a few barrels in 2006 to 530,000 a day in December 2011.
The unprecedented unconventional oil development also comes with environmental protection and regulation challenges. Hydraulic fracturing is increasingly perceived as contributing to water and land contamination, causing natural gas infiltration into fresh water aquifers, and even triggering earthquakes. After more than one million hydraulic fracturing operations in the United States since 1947 (hydraulic fracturing is not a new technology) and comparatively few accidents, shale oil and gas recovery activity can be managed with appropriate best practices and adequate enforcement. Industry needs to develop technological solutions to minimize water use, minimize and report chemical use, and carefully monitor production sites. However, if such a collective effort by industry does not materialize, government may respond with more onerous regulation in the near future that could impact U.S. shale oil production.
While the surge in production in the Western Hemisphere in coming years will in effect leave the region self-sufficient in oil, the global nature of the market makes that all but meaningless except in psychological terms, Maugeri argues. He adds that the industry will need to make major investments to keep oil production environmentally safe to avoid threatening the new bonanza.
A major increase in Iraq’s oil output as it regains stability, which will add new production in the Persian Gulf region—potentially destabilizes OPEC’s ability to manage output and prices, he notes.
The combination of new production in the Western Hemisphere and the still growing production in other parts of the world could lead to a sharp drop in oil prices, Maugeri suggests, which if steep enough could lead oil companies to cut back on investment and ultimately slow down oil supplies. But if oil prices remain above about $70 per barrel, sufficient investment will occur to sustain continued growth in production, possibly leading to a stable phenomenon of oil overproduction after 2015.
Leonardo’s conclusions are not only startling, but his paper provides a transparent explanation for how he reaches them—something lacking in many studies. His findings have major implications for geopolitics, suggesting important shifts in how countries interact and wield influence.—Meghan L. O’Sullivan, the Jeane Kirkpatrick Professor of the Practice of International Affairs at the Kennedy School and director of the Geopolitics of Energy Project
Maugeri, Leonardo. "Oil: The Next Revolution." Discussion Paper, Belfer Center for Science and International Affairs, Harvard Kennedy School, June 2012
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