(Repeats column published on Nov 14 with no changes to text.)
By John Kemp
LONDON, Nov 14 Shale will not significantly boost oil production
or bring down prices in the long term, according to the International Energy
The surprising findings are contained in the latest version of the agency's
annual World Energy Outlook (WEO).
Worldwide production of light tight oil (LTO) from shale and other
formations requiring fracking is expected to grow from 2.0 million barrels per
day in 2012 to just 5.8 million bpd by 2030, before declining slightly to 5.6
million bpd in 2035.
The agency predicts shale will account for no more than 6 percent of annual
oil and liquids production over the next 20 years.
And the shale revolution will remain almost entirely confined to North
America. The agency expects U.S. LTO production to plateau around 4.3 million
bpd between 2025 and 2030, before declining slightly as the most productive
sweet spots in shale plays are used up.
As for other countries, the agency says they will struggle to replicate the
North American experience because of regulatory barriers and the lack of a
competitive upstream oil sector.
By 2035, the agency projects, LTO production will reach just 450,000 bpd in
Russia, 220,000 bpd in Argentina and 210,000 bpd in China.
These forecasts are extremely conservative. The agency predicts that the oil
industry will struggle to add the same amount of output in the rest of the world
over two decades as from a single shale play in the United States.
In the decade to 2025, the IEA thinks that shale, coupled with Canada's oil
sands and deepwater production from Brazil and elsewhere, will reduce reliance
There are already hints that Saudi Arabia, the United Arab Emirates and
Qatar could reduce investment in new capacity as a result. But by the late 2020s
the agency says dependence on OPEC will start to increase again.
The IEA dismisses shale's significance for both peak oil and the world's
long-term reliance on OPEC.
Nor does the agency think natural gas will emerge as a serious rival to
refined oil products as a transport fuel by 2035. The share of natural gas in
the road-transport market is forecast to rise from 2 percent currently to 2.8
percent by 2020 and 4.8 percent by 2035. In the United States, gas will displace
just 450,000 bpd of diesel consumption by 2035.
As a result, the agency's forecasts for long-term oil prices and consumption
have changed little from previous years. In fact, the agency's long-term price
projections have remained remarkably constant since 2008, despite the financial
crisis and the shale revolution (Table 1).
Table 1: IEA long-term price projections
WEO Edition Projected oil price Time horizon Central scenario name
WEO 2007 $67 (2006$) 2030 Reference scenario
WEO 2008 $122 (2007$) 2030 Reference scenario
WEO 2009 $115 (2008$) 2030 Reference scenario
WEO 2010 $113 (2009$) 2035 New policies scenario
WEO 2011 $120 (2010$) 2035 New policies scenario
WEO 2012 $125 (2011$) 2035 New policies scenario
WEO 2013 $128 (2012$) 2035 New policies scenario
PRICE ABOVE MARGINAL COST
The agency admits that the cost of the marginal barrel needed to meet
expected 2035 demand is probably no more than $80-90 in real terms, which is
significantly less than the real price of $128 it sees for the end of projection
In theory, investment and production should expand until prices are driven
down to marginal cost. But the IEA believes the industry's expansion will be
limited by the restrictive depletion policies and the revenue needs of OPEC
producers as well as by constraints on raising output outside the cartel,
particularly the shortage of experienced personnel.
"There are many constraints on supply keeping pace with demand, even though
production projects may be highly profitable," the agency explains. "The oil
price trajectory, at a level above the marginal cost per barrel, serves the
purpose of limiting demand to a level that can reasonably be expected to be
The IEA noted that widespread shortages of skilled personnel are plaguing
the industry and that it will take 10 to 15 years for new recruits to gain
enough experience to assume leadership positions.
"Empirical evidence suggests the oil industry is very risk-averse in its
recruiting policies, leading to long lasting imbalances," the report warns.
"If oil prices rise with time, it is not because there is a shortage of
lower cost oil, but rather because the industry's capacity to increase oil
production at the same pace as demand growth is limited," the agency concludes.
"High prices are required to moderate the growth in demand and bring it into
equilibrium with the rate of increase of supply."
Other factors expected to keep prices well above marginal cost are political
risks and the high risk-adjusted returns required by the major international oil
The main problem with the WEO projections is that they assume that the main
barriers to industry expansion will not be overcome by 2035, even though the
industry has more than 20 years to work on them.
It is difficult to believe skill shortages cannot be alleviated in 20 years,
or that political and regulatory barriers and the lack of drilling equipment
holding back shale development outside the United States cannot be overcome.
If the major oil companies remain risk-averse and OPEC producers in the
Middle East continue to restrict supply, experience suggests new players will
emerge and new sources of production will come on stream.
North America's shale plays have been developed in less than a decade by
smaller, innovative oil and gas firms, despite or even because of, the lack of
interest from the majors.
The IEA is producing long-term projections for supply, demand and prices,
but the analysts are assuming that producers and consumers will remain subject
to the same constraints that keep supply and demand inflexible in the short
In reality, over 20 years almost all aspects of technology on both the
supply and demand side will be flexible in response to price signals.
Table 2: IEA long-term supply projections
WEO Edition Projected oil supply Time Horizon Central scenario name
WEO 2007 113.7 million bpd 2030 Reference scenario
WEO 2008 103.8 million bpd 2030 Reference scenario
WEO 2009 103.0 million bpd 2030 Reference scenario
WEO 2010 99.0 million bpd 2035 New policies scenario
WEO 2011 99.4 million bpd 2035 New policies scenario
WEO 2012 99.7 million bpd 2035 New policies scenario
WEO 2013 101.4 million bpd 2035 New policies scenario
The IEA's long-term projections for both supply and prices have stayed
almost unchanged since 2008, as Tables 1 and 2 illustrate. Increases in
predicted shale output have been exactly offset by reductions in other
If anything, the IEA's projected long-term prices have been rising, not
falling, which is a surprising response to the deployment of a new technology.
In response to these arguments, the IEA counters that its price forecasts
would have been even higher in the absence of the shale boom.
"If it were not for LTO from shale, worldwide production would certainly be
lower in 2035 and prices would be higher than presented in the Outlook
scenarios," an IEA spokesman said in an email.
"The operative question is not whether shale has a long-term impact but
whether the impact of shale is so great that it will fully compensate for all
anticipated increases in demand plus anticipated decreases in production from
existing fields," hr added.
"Our projections for LTO are based on current estimates of resources, which
are still poorly known, and there is certainly room for upside - notably in the
U.S. - if resources turn out to be larger."
The agency includes a low-case scenario based on higher output from shale in
the United States, as well as other sources, which could see oil prices as low
as $80 per barrel between 2020 and 2035.
But that optimism has not yet filtered through into its central projection.
The invariance of the IEA's projections is a cause for concern. Nothing in
the last five years has caused the agency to revise its fundamental long-term
view. It suggests either that the agency has been right all along or that its
forecasts are not responsive enough to changes in prices and technology.
If the agency projected that long-term oil prices would be around $125
before the shale boom, its forecasts should now be lower to take account of
(editing by Jane Baird)