IHS CERAWeek 2013 – A summary of day three

The game-changing impact of unconventional oil and gas resource development was very high on the agenda on Wednesday at IHS CERAWeek 2013. A number of speakers described the wider impacts that North American unconventional oil and gas development has had on economies and energy markets, even in distant locales, as they continue to develop their own resources and evaluate other ripple effects.

• During his opening keynote speech, Bob Dudley, Group Chief Executive at BP, said that shale gas development has had a transforming effect on the US economy in terms of employment, diversification of the energy industry across the states, and the US balance of trade. Many other regions have similar development potential, including Russia, but will require energy investments "on an epic scale." Mr. Dudley expects Algeria to develop shale gas resources next and said that progress will be slow in Europe, while China will find means to exploit domestic shale resources over the longer term.
• Igor Sechin, President of Rosneft, stressed the importance of ongoing investment in high technology development in the oil and gas sector, which he believes will benefit national economies, create new jobs, and support the development of related industries. He expressed hope that continued advances in technology, coupled with the abundance of energy resources around the world, will help to drive greater global energy security and reduce grounds for future international conflict over energy resources.
• Charif Souki, Chairman of the Board of Directors, CEO, and President of Cheniere Energy, said that shale gas growth in the United States has rapidly changed the liquefied natural gas industry, increasing the adoption of hub-based pricing structures. Sellers with oil-linked prices have increasingly had to incorporate rebates and discounts.
• Joe Oliver, Canada's Minister of Natural Resources, said that the transformation of global energy markets provides the opportunity for a new era in North American energy security. He stated that oil sands will be a key contributor to the global energy supply. Non-OECD countries such as India and China are expected to drive demand growth, and Canada plans to compete for those markets.

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Several speakers were more skeptical about the potential for replication of the North American experience in other places.

• Mark Papa, Chairman and CEO of EOG Resources, said that EOG expects the unconventional resource base to provide US domestic supply for at least 50 years. However, he was skeptical about the potential pace and volume of shale gas and oil development outside of North America, noting that in the nine years since the first successful drilling in the Barnett Shale play, there has yet to be a commercially viable discovery outside of the continent.
• Joseph C. Geagea, President, Chevron Gas and Midstream, pointed out that the rapid development in North America is not likely to be replicated in other regions of the world, because other propelling forces would be needed, including decent infrastructure, conducive regulation, promising geological conditions, and a liquid buyer-seller market mechanism.

Several speakers focused on the unprecedented growth in recent years in unconventional oil and gas supply and the prospects for the future.

• Daniel Akerson, Chairman and CEO, General Motors, said that the federal and state revenue windfall from unconventional oil and gas development is allowing us "dream big again." Natural gas also presents a huge savings opportunity for commercial vehicle fleets and truck operators, but building out the necessary fueling infrastructure will be paramount to preventing natural gas from becoming a niche product in transportation.
• Adam Sieminski, Administrator, Energy Information Administration (EIA), US Department of Energy, said that the latest EIA forecasts for oil and gas production in the United States could be significantly underestimated, as the rapid growth of the industry continues to surpass expectations. He also noted that the rapid growth of shale oil and gas, combined with flat oil demand owing in part to improved efficiency, means that carbon emissions in the United States are unlikely to surpass the peak set in 2005 over the next 20 years.
• Barry Smitherman, Chairman of the Texas Railroad Commission, discussed the increase in the development of oil and gas resources in Texas as a result of technology advancements in hydraulic fracturing and horizontal drilling. Crude oil production has grown from less than 1 million barrels per day (mbd) in 2009 to nearly 1.5 mbd in 2012, he noted. Rising production is expected to lead to a 34% increase in industry jobs by 2020 and to net approximately $3.5 billion per year in tax revenue to the state of Texas.

The link of unconventional oil and gas resources to economic competitiveness was a recurring theme.

• Chris Weston, President and CEO, Direct Energy, described how investment decisions in the United Kingdom and the United States have diverged as a result of the shale gas revolution, with much greater concern about reserve margins and efforts to reduce power demand in the United Kingdom. He noted that the average consumer household in the United States now uses 3.5 times more power than its equivalent in the United Kingdom and yet has also seen a 20% decline in the cost of electricity.
• Hirobumi Kawano, President of Japan Oil, Gas, and Metals National Corporation (JOGMEC), said he believes that industries in the United States are benefiting from low natural gas prices in the short term but also that market globalization may narrow that advantage over the long term.
• Patrick Kron, Chairman and CEO of Alstom, noted that energy is a significant component of production costs and that low energy costs can provide a competitive advantage. However, he also noted that there are other equally important determinants of an industry's regional competitiveness, such as demographics, labor productivity, environmental regulations, and infrastructure. The transport of unconventional oil and gas resources to markets has brought about infrastructure challenges, since these resources are often not located near existing pipeline infrastructure.
• Al Monaco, President and CEO of Enbridge, said that the rapid surge in shale oil production was driving a "replumbing of the pipeline network." Mr. Monaco noted that the traditional flow of oil from coastal regions inland is now being reversed with the surge of shale oil production in the US Mid-Continent, and new infrastructure is needed to ensure that crude producers can gain access to new markets.
• Matt Rose, Chairman and CEO of BNSF Railway, said that rail offers a reliable, safe, and flexible alternative to pipelines. Rail users also benefit from an extensive network that enables the transportation of oil to and from a wide range of destinations across the country.

Risks related to oil and gas operations-including security risks and risks associated with community distrust of development-were a theme of several speakers.

• Kristen Lovejoy, General Manager Security Services Division at IBM, noted that cyber attacks have caused significant disruptions in the energy industry. She said that the average energy or mining company is attacked 2.4 million times per week and 1.8 of these attacks results in a cyber incident or breach.
• Satish Pai, Executive Vice President of Operations for Schlumberger, said that service company line managers are accustomed to dealing with operational, service quality, and safety-related risks. But now line managers must also learn how to mitigate other types of risk, including security, political, and information technology-related risks.
• Doug Bannerman, Head of Social Responsibility for Statoil Gulf Services, and Keryn James, Chief Executive Officer, Asia Pacific for ERM, both noted that increased development is creating a more challenging operating environment in which environmental and community risk can have an impact on the bottom line. Ms. James noted that negative media attention to unconventional resource development is increasing and that this "opposition comes with a price tag." Mr. Bannerman explained that industry invests millions of dollars in the development of each well, and friction points with the community can devalue that investment by increasing costs, causing delays, or derailing the project entirely.

Posted 7 March 2013

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.