Hydraulic fracturing, horizontal drilling and 3D seismic imaging have opened up enormous new deposits of unconventional energy reserves, and the center of energy gravity is moving westward, towards the Americas. That much is clear. What is rather less certain is whether recent breakthroughs in tight oil and shale gas extraction amount to an “energy revolution,” and the extent to which they will affect established players in world energy markets such as Saudi Arabia.
Indeed, it is striking how little anxiety officials in Riyadh and other Gulf capitals express about the developments taking place in the Western Hemisphere. In fact, energy experts and officials in the Gulf states argue that for a combination of economic and technical reasons, the increase in tight oil and shale gas production may be substantially lower than most observers predict. Attention has turned to the low permeability of tight oil formations in the US and the rapid and steep declines in productivity of most wells, meaning that large numbers of wells are needed merely to sustain production, let alone expand it.
Industry analysts at Jadwa Investment in Saudi Arabia suggest that overall tight oil production in the US may enter into decline as early as 2018 and that US shale gas production will plateau after 2020 as low gas prices render shale gas production unprofitable. They also believe it will be difficult to replicate the “uniquely favorable above-ground factors”—efficient industrial services, infrastructure, legal and financial systems—that have facilitated the extraction of unconventional energy reserves in North America and elsewhere.
Rapid falls in initial output in the US also throw contrasts between tight oil fields and “super-giant” conventional oilfields in the Gulf into sharp relief. Oil production began in the Ghawar and Burgan fields in Saudi Arabia and Kuwait respectively in the late-1940s, immediately after the Second World War. Seventy years later, the two fields are still producing large quantities of oil, with the inevitable ageing of the fields partially offset by a better understanding of their geology—an understanding that allows for enhanced oil recovery and other techniques designed to lengthen their shelf-life still further. Companies such as Saudi Aramco have invested heavily in upgrading their facilities and, for all the challenges faced by regional economies, remain globally competitive and market-leaders in a wide range of derivative industries such as aluminum and petrochemicals.
In addition, the dynamics of a rapidly changing global order with multiple centers of economic gravity also open up additional avenues for Gulf producers. The Gulf Cooperation Council (GCC) states, led by Saudi Arabia, Qatar and the United Arab Emirates, have emerged as key actors in the broader geo-economic re-balancing. The great majority of oil and gas produced in the Gulf now flows east rather than west, and in many cases is locked into long-term gas export agreements or, in the case of oil, is being augmented by the formation of strategic oil reserves between producing and consuming states. Gulf–Asia ties have proliferated markedly in the past decade, and the great importance of the Gulf as a reliable and stable energy supplier to Pacific Asian economies will continue to dominate relations between the two.
In a very real sense, the Gulf economies have already tested the direction of the prevailing winds and changed course with it. Strong demand from economies such as China and India, even at a slower rate than earlier forecasts, will likely keep oil prices at comfortable levels for GCC producers. The Crown Prince of Saudi Arabia concluded a state visit to India, Japan and China earlier this year during which multiple trade and energy agreements were reached, underlining the resilience of shifting geo-economic ties.
None of this is to marginalize the important economic challenges that GCC states are already confronting, and the rapidly rising breakeven price of oil as a major dilemma that defies simple resolution. Indeed, it is precisely this issue, rather than the geopolitical implications of the shale revolution, that will be keeping Gulf officials awake at night, and the way in which GCC states respond to domestic political and economic challenges is what will ultimately determine whether they end up as “winners” or “losers” in the reshaping of the energy landscape as the twenty-first century continues to unfold.
All views expressed in this blog post are those of the author and do not necessarily represent the views of, and should not be attributed to, The Majalla magazine.