By Dmitry Zhdannikov and Alex Lawler
Oil derricks like this one outside of Williston, North Dakota, are part of a shale oil boom that has helped put the United States on track to overtake Saudi Arabia as the world's leading oil producer.
LONDON, Nov 18 (Reuters) - If Saudi Oil Minister Ali al Naimi wants to stop conspiracy theories spreading before a crucial OPEC meeting next week, it's too late.
Naimi's intervention last week after a two-month silence failed to address a question energy markets want answered: is the OPEC leader no longer willing to defend oil prices which have dived by a third to their lowest since 2010, and is it pursuing new commercial or even geopolitical goals?
Saudi Oil Minister Ali al-Naimi.
Despite Naimi's insistance that Riyadh wants stable markets, diplomatic and market sources say Saudi officials told recent private briefings that the kingdom can live for some time with current, or even lower, levels.
Reading Saudi oil policies has long been like Kremlinology - understanding the politics of that other secretive power, Russia. The next OPEC meeting on Nov. 27 is taking this art to a new, higher level.
A number of explanations have been offered to fill the information vacuum on Riyadh's intentions and they aren't all from the usual conspiracy theorists in Russia and Iran, which are at loggerheads with the kingdom.
Oil market watchers are divided on the outcome of the meeting in Vienna. Predictions range from a large OPEC production cut to revive prices through a small cut to none at all.
Even those who have known Naimi for decades are puzzled. "For the first time, I really do not know what is likely to happen at the meeting. It is not clear," said a long-serving senior OPEC delegate.
When Naimi finally spoke on Nov. 12, he said Riyadh's desire for stable markets had not changed. "Saudi oil policy... have been subject a great deal of wild and inaccurate conjecture in recent weeks. We do not seek to politicise oil ... For us it's a question of supply and demand, it's purely business," he said.
According to four market and diplomatic sources, who asked not to be named, Saudi officials briefed OPEC watchers privately in New York and Riyadh in September and October.
Nasser al-Dossary, Saudi Arabia's national representative to OPEC, Naimi's deputy Prince Abdulaziz bin Salman and the kingdom's OPEC governor Mohammed Al-Madhi attended at least one of these meeting to give the message that, with its large currency reserves, the Saudi kingdom was prepared to withstand oil prices as low as $70-$80 per barrel for up to a year!
Benchmark Brent crude oil slipped to $79 on Tuesday.
Most members of the cartel apart from Saudi Arabia need much higher prices to balance their budgets but ironically are unable or unwilling to reduce their output to counter a global glut caused by slowing economic growth in China and Europe, just as U.S. oil production booms.
SEEING OFF SHALE OIL
Should the Saudis tell fellow OPEC members, badly suffering from the oil price collapse, that they will not cut output, debate will intensify on what prompted the policy shift.
One possibility is Riyadh wants to see off U.S. shale oil, which is believed to need much higher prices than conventional production to remain competitive. "They are after U.S. shale," said one participant in the meetings with Saudi officials.
However, the source added that the Saudis might also regard low prices as an opportunity to put even more pressure on Iran and Russia for supporting Syrian President Bashar al-Assad, an arch-enemy of Riyadh, in the country's civil war.
Several Saudi oil sources have denied over the past month that geopolitics are now driving the policy, but they have failed to stifle theories that Riyadh and Washington are working together to hold down prices.
"What is the reason for the United States and some U.S. allies wanting to drive down the price of oil? To harm Russia," Nicolas Maduro, president of fellow OPEC member Venezuela, said last month.
Masoud Mirkazemi, an Iranian lawmaker and former oil minister, said Riyadh was helping the G20 group of major economies. "Saudi Arabia, which intends to manage OPEC, serves the interests of the G20 group," he said.
US President Barack Obama (R), Saudi king Abdullah
"GLOBAL OIL WAR"?
In Russia, the idea of a Saudi-U.S. plot against Moscow has become common currency as the economy struggles under the effects of low oil prices and Western sanctions imposed over its annexation of Crimea and support for rebels in eastern Ukraine.
Leonid Fedun, a co-owner of private oil firm Lukoil, cited President Barack Obama's visit to Riyadh in March. "Obama travelled to meet the king of Saudi Arabia just after the Crimea events to push him to these actions (to lower the oil price)," Fedun, whose firm has large U.S. assets, said last month.
Russia and Iran routinely allege U.S. plots against their economies, but the conspiracy theories are spreading.
"Is it just my imagination or is there a global oil war underway pitting the United States and Saudi Arabia on one side against Russia and Iran on the other?" New York Times columnist Thomas Friedman, wrote last month.
U.S. Secretary of State John Kerry sidestepped the issue after a trip to Saudi Arabia in September. Asked if past discussions with Riyadh had touched on Russia's need for oil above $100 to balance its budget, he smiled and said: "They (Saudis) are very, very well aware of their ability to have an impact on global oil prices."
National Geographic News: 12. November 2012
U.S. to overtake Saudi Arabia, Russia as World's top energy producer
By Thomas K. Grose in London
Picture of oil derricks at South Belridge oil field in Kern County, California
In an indication of how "fracking" is reshaping the global energy picture, the International Energy Agency in 2012 projected that the United States will overtake Saudi Arabia as the world's largest oil producer by 2017.
And within just three years, the United States will unseat Russia as the largest producer of natural gas.
Both results would have been unthinkable even a few short years ago, but the future geography of supply has shifted dramatically due to what IEA calls America's "energy renaissance." The revival can be credited to controversial technologies such as hydraulic fracturing of shale and deepwater production that have enabled the industry to tap into abundant, unconventional sources of natural gas and oil. As a result, new energy frontiers have opened in Pennsylvania and North Dakota. (Related: " Natural Gas Stirs Hope and Fear in Pennsylvania")
The bottom line for the United States is fulfillment of a goal that eluded seven presidents over nearly four decades: energy independence. The U.S., which imports 20 percent of its total energy now, will become largely self-sufficient by 2035, concluded the IEA's annual World Energy Outlook, often viewed as the bible of the industry. Add in Canada, which has its own unconventional production boom in Alberta's oil sands, and the continent is set to be a net oil exporter by 2030. (Related Quiz: "What You Don't Know About World Energy")
"North America is at the forefront of a sweeping transformation in oil and gas production that will affect all regions of the world," said Maria van der Hoeven, executive director of the IEA, a Paris-based organization charged with maintaining global energy security.h
It all has happened so swiftly that world governments have not yet adjusted to the new realities, observers say.
Francis O'Sullivan, executive director of the energy sustainability challenge program at the Massachusetts Institute of Technology, says he doubts if Washington policymakers have yet "fully factored in the implications of the recent, quite dramatic, developments in the unconventional oil space, and what this might mean in terms of larger domestic oil resources, and the potential for greater energy security." (Related Interactive: Breaking Fuel From Rock)
Catching Saudi Arabia
U.S. imports of oil are on track to fall from 10 million to 4 million barrels per day, Fatih Birol, IEA's chief economist and the main author of the report, told a London news conference. However, he added, increased domestic production, including biofuel, accounts for only 55 percent of the huge reduction in imported oil. The other 45 percent is due to increasing federal fuel efficiency standards for cars and trucks.
According to IEA, by 2020, America's oil production will reach 11.1 million barrels per day, up from 8.1 million in 2011. Saudi Arabia's production, meanwhile, will decline from 11.1 million to 10.6 million barrels per day. By 2025, IEA projects, U.S. production will slip back to 10.9 million barrels per day, but Saudi Arabia's will have increased to only 10.8 million barrels per day.
The picture on natural gas is even more dramatic. By 2015, the U.S. should be producing 679 billion cubic meters (bcm) of natural gas, up from 604 bcm in 2010. That will be enough to edge out Russia, where production will increase too, but is projected to reach only 675 bcm in three years. By 2020, the spread between the two nations will widen, with U.S. production of 747 bcm, well ahead of Russia's forecast 704 bcm. The U.S. should become a net gas exporter by 2020, the report adds.
No country an island
"The global energy landscape is changing rapidly, recasting the roles of countries and fuels," van der Hoeven said. What is happening in North America will certainly affect other countries worldwide, she added. "No country is an energy island."
That means the resurgence of American petroleum production won't make U.S. consumers any more immune to the often stomach-churning price swings of the international oil market. "Oil is more or less fully fungible," says MIT's O'Sullivan. And U.S. output will be poured into the global market, where demand elsewhere grows apace.
Indeed, as America's need for imported oil declines, Asia is rapidly taking up the slack. The report estimates that by 2035, fully 90 percent of Middle East oil exports will head for Asia. That's a shift that will require Asian countries to put more resources toward keeping strategic shipping routes of oil secure. "There is a major new trade axis building between the Middle East and Asia," Birol said.
Indeed, Iraq alone will see its exports to Asia jump from 50 percent of output to 80 percent. (Related: "Iraq Poised to Lead World Oil Supply Growth, but Obstacles Loom") The IEA reiterated its forecast last month that Iraq's production of oil would jump from 3 million to 8 million barrels per day by 2035, helping the war-torn country leapfrog over Russia to become the world's second largest exporter of oil, after Saudi Arabia.
Another effect of the altered energy landscape is a large variance in natural gas prices. A few years ago, global prices of natural gas varied little from region to region. But natural gas prices in Europe are now five times higher than in the United States, and Asia's are eight times greater. However, van der Hoeven said, as more gas becomes available for global export, prices outside the U.S. should go down, too.
Demand still growing
The overall demand for energy worldwide should grow by a third between now and 2035, the report said, from 12,380 million tons of oil equivalent (Mtoe) in 2010 to 16,730 Mtoe in 2035, an increase driven by the rise in living standards in China, India, and the Middle East. The share of demand for energy in the developing world will jump from 55 percent in 2010 to 65 percent in 2035, powered by China, which will see its demand for energy increase by 60 percent over that period. (Related: "Pictures: A Rare Look Inside China's Energy Machine")
Demand for energy in the developed countries that make up the Organization for Economic Co-operation and Development (OECD) will essentially be flat, IEA projects. Use of coal and oil to meet that demand should drop to just 42 percent from 57 percent today.
The IEA chided world governments for failing to do enough to improve energy efficiency, saying that two-thirds of the economic potential to improve efficiency is not being realized. If those efficiencies were tapped, it said, total energy demand between now and 2035 could be halved, without any decline in living standards.
Globally, demand for fossil fuels will continue to grow in absolute terms through 2035, but together their total share of the energy mix should drop from 81 percent to 75 percent. Worldwide demand for oil is forecast to grow to 99.7 million barrels per day in 2035, up from 87.4 million last year, with China alone accounting for half that amount.
By 2035, the IEA said, the price of oil is expected to be $125 per barrel in inflation-adjusted terms, though the nominal price is enough to induce sticker shock in 2012: $215.
Global natural gas demand should increase by 50 percent to 5 trillion cubic meters (tcm) in 2035. Within OECD countries, gas is overtaking coal as the fuel of choice for generating electricity. In the U.S., for instance, the amount of electricity generated by coal has fallen from 50 percent to 32 percent in just a few years. Although use of coal will continue to fall in the U.S., Europe, and Japan, overall demand for coal should still grow by 21 percent through 2035, because of increasing use in China and India.
Although some OECD countries, particularly Germany and Japan, are cutting back on nuclear power in the wake of the 2011 accident at Japan's Fukushima Daiichi nuclear plant, nuclear power is still expected to account for 12 percent of global electricity generation by 2035, thanks to increased use of nuclear power in China, Korea, and Russia.
Electricity generation from renewables should grow from 20 percent in 2010 to 31 percent by 2035, IEA projects. Within OECD countries, most of that growth comes from increased wind-energy production, while in non-OECD countries, hydropower is the main source of clean energy. Growth in demand for renewables, including biofuels, is still largely driven by government subsidies, the report said. Last year, those subsidies totaled $88 billion, a 24 percent increase from 2010.
Overall demand for electricity will skyrocket by more than 70 percent by 2035, reaching 32,000 terawatt-hours (TWh), with almost all that increase coming from non-OECD countries, with China and India alone accounting for half. Prices for electricity overall should increase 15 percent by 2035, but some regions will pay much more than others. In the U.S., for instance, average household electricity prices in 2035 should be about 14 cents per kilowatt-hour (kWh), while the price in Europe will average closer to 25 cents per kWh. That big difference in the cost of electricity will likely give American industry a competitive advantage over European rivals, Birol said.
Amid its forecast for rising energy demand and production, the report, unsurprisingly, does not paint an optimistic picture of efforts to contain greenhouse gas emissions. IEA projects that energy-related carbon dioxide emissions will rise from an estimated 31.2 gigatonnes (Gt) last year to 37 Gt in 2035, which could cause a long-term average temperature increase of 3.6 degrees Celsius.
In a nonbinding accord signed in 2009 in Copenhagen, nations agreed to the scientific view of limiting temperature rise to 2 degrees Celsius, but efforts to forge a global agreement to cut fossil-fuel emissions have been unsuccessful.
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