New Global Hydrocarbon Energy Paradigms
The Big Picture
People are familiar with the concept of Peak Oil; in which it is assumed that the world has passed the point at which new oil discoveries have failed to keep pace with demand. This big picture is however a mountain range, made up of individual peaks. These peaks can be identified and climbed in relation to their location and hydrocarbon bases. The topography also changes; depending on the supply and demand conditions for each hydrocarbon and geographical location.
Peak Oil is Actually Twin Peaks
What may surprise people to learn, is the fact that South and Central America has taken over from the Middle East as the oil giant.
Americans may draw comfort from the fact their peak has risen, so that they are less dependent on foreign oil than they used to be during the last crisis in the 1970's.
The Middle East is the present, however South and Central America is the future of oil.
Europe and Asia can draw no comfort from their oil fundamentals; and both regions remain strategically challenged by the fact that they are large net oil importers.
The peaks have also grown as new discoveries have been found. To use the current vernacular, the Peak Oil Can has been kicked down the road.
Demand Erodes the Peaks and Kicks the Oil Can Back
Asian demand is the primary source of demand outstripping the supply of oil. Europe and Eurasia also contribute towards this imbalance significantly. America contributes to a lesser extent than Asia. Europe and Eurasia are contributors to this imbalance also. The Credit Crunch and the anaemic recovery has actually seen American demand continue to fall against rising domestic supply.Central and South America is emerging as a significant demand driver. Asia and Europe are the most strategically challenged by Peak Oil.
The Gulf Countries Stop Being Exporters
An Emerging Demand Risk From the World's Second Peak Producer
The Gulf Countries have traditionally been the source of oil. Economic and demographic expansion in this region has shifted the demand curve more rapidly than the static supply curve in the last twenty years. Subsidised domestic energy consumption has exacerbated this shift.
Citi recently warned on this emerging threat:
From Heidy Rehman at Citi:
• Saudi Arabia Could be an Oil Importer by ~2030 — Saudi Arabia is the world’s largest oil producer (11.1mbpd) & exporter (7.7mbpd). It also consumes 25% of its production. Energy consumption per capita exceeds that of most industrial nations. Oil & its derivatives account for ~50% of Saudi’s electricity production, used mostly (>50%) for residential use. Peak power demand is growing by ~8%/yr. Our analysis shows that if nothing changes Saudi may have no available oil for export by 2030.
• It Already Consumes All Its Gas Production — Saudi Arabia produces 9.6bn ft3/day of natural gas. This is entirely consumed domestically. It is looking to raise gas production to 15.5bn ft3/day by 2015E, implying a 2011-15E CAGR of 12.7%. However, peak power demand is growing at almost 8% pa. We believe Saudi Arabia will need to find new sources to meet residential & industrial demand.
The region has a strategic dilemma. Since it has no diversified industrial base it must rely on oil exports for income. If it consumes all its oil production domestically however, it will have no income unless it can diversify this industrial base.
Gas conforms to the conventional Peak model. The Gulf is the Everest of gas; much of this was Combined Gas, which was burned off as a waste biproduct from the oil industry. Oil men used to joke that if you discovered gas once it was an accident; and twice you got fired. Today gas is a blessing.As these economies grow rapidly, both Combined and Uncombined Gas are now being used for domestic energy production and petrochemical feedstock. The decline in the Reserve to Production Ratio is alarming and economically disruptive on a domestic and global basis.
Great fanfare is made about North American Shale Gas, but this is a molehill against the mountain of conventional gas reserves of the major producing regions.
Russia is the observable peak of supply, that will increase in importance as the Gulf declines. The Middle East is the present and Russia is the future of gas.
The good news however is that the size of the Peak has been increased by new discoveries. The peak has been raised and the can has been kicked down the road again.
As was the case with oil, Asia is the most challenged by the supply-demand imbalance fundamentals from gas.
America is a net exporter of gas; which has been reinforced by the weak economic recovery and overcapacity in Shale Gas during the Credit Boom.
European demand has been balanced by Russian supply; however the Eurozone Debt Crisis has tipped this into an oversupply position.
The Gulf region once again presents a strategic challenge to the global fundamentals; as it moves from net exporter to self-sustaining and possibly net importer in the near future.
Energy Trade Flows
The World of Nations
The trade patterns in oil and gas represent the current fundamentals. The main supply regions are the hubs that supply the consumers.
In the case of both oil and gas, the density of supply arrowheads signal that Asia is the main destination of exports.It is interesting to observe how the patterns will change as the new fundamentals create a future paradigm.
The Gulf hub status, for both oil and gas, looks set to disappear, as it becomes self-sustaining; and then may become an arrow head as it becomes a net importer.
Central and South America emerges as a major oil hub; however it may too become self-sustaining as economic prosperity comes from its oil exports.
Africa will rise in importance as a hub. It's challenge is to maintain political and economic stability, in order to progress to self-sufficiency and beyond.
Russia is clearly the gas gorilla in the room; that Europe and Asia must come to terms with as the source of gas in the present and the future.
In anticipation of these changes, one can already see the changing dynamics being played out in current Geopolitics. The American "Pivot" to Asia and the "Arab Spring" both have a fundamental basis in the energy flows of the present and future.