London, 22 November 2011: Reuters

In a landmark speech given in Riyadh on Monday, the head of Saudi Arabia's national oil company acknowledged that new technology has transformed the world energy outlook from scarcity to plenty. Worries about peaking oil and gas supplies have been replaced by news of increasingly abundant resources, as conventional production pushes into new frontiers and hydraulic fracturing unlocks unconventional supplies from tight rock formations, according to Saudi Aramco's Chief Executive Khalid Al-Falih.

"Abundance isn't limited to gas reserves, but is also the new headline when it comes to oil. Rather than supply scarcity, oil supplies remain at comfortable levels, even given rising demand from fast-growing nations like China and India," Falih said.

"Well-established conventional resources will continue to account for most production, but there is also a great deal of excitement around untapped conventional resources in frontier areas like deep offshore and the Arctic."

"Last year, even as the world consumed nearly 30 billion barrels of oil, not only was the industry able to replace this production, but global petroleum reserves actually increased by nearly seven billion barrels, as companies increasingly turned toward higher risk areas."

Falih singled out the revolutionary potential of fracking and horizontal drilling technologies being employed in North Dakota's oil-bearing Bakken formation. "There is a new emphasis in the industry on unconventional liquids, and shale gas technologies are also being applied to shale oil. The massive heavy oil potential in both North and South America is drawing greater attention, and the future development of kerogen-based oil shales remains an enormous target," he said.

"Some are even talking about an era of energy independence for the Americas ... While that might be stretching the point, it is clear that the abundance of resources and the more balanced geographical distribution of unconventionals have reduced the much-hyped concerns over energy security."

Falih's candid assessment, from the top official charged with developing the world's largest conventional resources, went much further than other big oil-exporting nations, in admitting technology is profoundly altering both the price outlook and the balance of power in the market over the medium term.

OPEC IN DENIAL

In its World Oil Outlook (WOO) for 2011, published earlier this month, OPEC was more cautious. "It is not yet clear whether the availability of economically viable shale oil is as great as that for shale gas" the cartel warned. "It is not already evident that some deposits will not be sufficiently mature to contain liquids, and some will be over-mature. The geographical, geological and operational challenges and associated costs across countries and regions will be diverse."

"Due to the lack of data, estimates of oil in place and recoverable volumes from these formations are still the subject of huge uncertainties," according to the WOO. While tight oil resources are known to exist in sedimentary basins around the world, OPEC noted outside the United States and Canada only three basins (in Argentina, Australia and France) have been sufficiently analyzed to have potential for near-term production. Development in France has already been halted by political and environmental opposition.

Political and regulatory barriers are the biggest obstacle to extraction of tight oil and gas. But the WOO also highlights practical problems from shortages of trained people to limits on drilling and fracking equipment, though all of these are likely to ease over time as more resources are pulled towards the sector.

OPEC acknowledged tight oil's potential. "Given the size of known shale oil deposits, even if only a fraction of them contain viable liquids, it translates into a significant resource." "At the global level, a very conservative estimate of global shale oil "proved" reserves, based on a 3 percent recovery factor, is less than 100 billion barrels. In this case, shale oil will add only incremental amounts to the medium-term global oil supply."

"A more optimistic estimate of global shale oil "proved" reserves, again with a 3 percent recovery factor, is projected to be more than 300 billion barrels. In this case, shale oil might prove to be a significant long-term contributor to global oil supply."

The cartel put costs for tight oil at $30-80 per barrel, well below current prices, suggesting the technology is viable, and noted costs could fall as the industry moves along the learning curve.

But in the end the WOO played down the impact. "It is evident that output from new shale deposits will not grow at a similar rate of 60,000 barrels per day per year as the Bakken basin is presently."

OPEC pushed back any substantial impact for ten years or more. "Within a decade it is quite possible that shale oil production could rise at significant levels year-on-year, assuming that prices remain well above $60 per barrel ... At present, however, shale oil should not be viewed as anything ore than a source of marginal additions."

IMPACT BY 2015

That timeline is too long. Past experience with shale gas fields, as well as offshore oil exploration, suggests new technologies can start to have a transformative impact in roughly half that time.

The prospect of higher oil supplies is starting to weigh on long-dated oil futures contracts from about 2014 onward. Prices for Brent futures maturing in December 2012 are still $9 per barrel (almost 10 percent) higher than at the start of the year. But prices December in 2014 are up only $2 per barrel, and contracts maturing in December 2015 are down slightly, brushing off strong demand from emerging markets and reports of a tightening medium-term supplydemand outlook.

It is hard to disentangle the prospect of rising supplies from other influences on the shape of the curve and longdated prices, and the market is notoriously bad at forecasting future prices more than a few months ahead. However, weakness in forward prices stands in marked contrast to 2008, when forward prices were generally above the spot market, reflecting expectations of limited supplies for the foreseeable future. In the current environment, many market participants expect the supply-demand balance to improve in the years ahead, leading to lower prices.

WELCOME REALISM

In his remarks, Falih also addressed renewable energy technologies ("green bubbles"), affordability and climate change, which together with the technological revolution in oil and gas markets he called the "four new realities" of the energy market.

He called for a "reset" in the energy conversation, to "recast our discussion in the light of actual conditions rather than wishful thinking. We need a more practical and flexible approach that is better able to imagine and deal with future uncertainties." It is a thoughtful speech that provides a template for thinking about the major challenges confronting the oil market over the next 5-10 years. Falih's call for optimism tempered by cold-eyed analysis and a healthy dose of scepticism is precisely right.

The industry, as well as producing and consuming country governments, finds it hard to have a calm and rational discussion about prices, security and climate change. But the terms of the debate have already begun to shift. The call for a rethink from the top of the world's biggest oil producer will accelerate the process.

Ends --

By John Kemp, Reuters market analyst – for Commodities Now with permission.

The views expressed here are his own.