In 1981, the World Bank reported that oil production would plateau by the end of the century. Now, more than 35 years later, production seems ever-increasing and new barrels are continually being discovered. In fact, since that report, global production has increased by 50 per cent and, for every barrel that has been consumed, two new barrels have been found.

Today’s recoverable oil is concentrated in relatively few areas – two thirds of it is found in the Middle East, Russia and North America.

These three regions are all home to large oil fields that can be extracted at a relatively low cost. It is this large-scale, low-cost advantage that will enable producers to increase capacity and gain market share from higher-cost producers.

Rise of fracking

Light Tight Oil (LTO), an unconventional oil resource that sits in impermeable rock, is found in abundance in the USA. This oil requires advanced drilling processes, such as hydraulic fracturing, to allow flow to the wellbore. This “fracking” process of blasting water at high pressure into rock to release the oil held within used to incur heavy costs. However, it is now becoming increasingly efficient, thereby making vast resources economically viable. 

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According to the International Energy Agency, extracting LTO through fracking is expected to account for most of the increased oil production in the USA between now and 2040. Furthermore, the U.S. will be the top contributor of incremental oil outside the OPEC cartel, adding 1.6 million barrels a day to the global market within five years, and supplying four times that in the next decade.

U.S. takes control

This steep rise in U.S. production will cause the global balance of power between new and existing producers to shift. While the U.S. stands to gain the most, others will also benefit. Within the OPEC cartel, the largest share of new supply is expected to come from the lower-cost producers in the Middle East, such as Iraq, Iran and the UAE. Supply from Russia is expected to remain stable, while that of the higher-cost producers, such as Nigeria, Algeria and Venezuela, is expected to decline.

In other words, a shift in oil production will allow the U.S. to overtake OPEC as the global swing producer that controls prices. This shift has been building for a decade, with U.S. shale fields now accounting for about half the global growth in oil production, while the country’s output has almost doubled.

While the U.S. will be the major beneficiary in this global shift – the growth of LTO as the marginal barrel of supply could potentially initiate opportunities elsewhere in the world.

Widespread fiscal reform

Nations that rely on income from lifting oil may look to reform their fiscal regimes to become more competitive. As capital heads towards the U.S., others may adapt their tax and royalty policy to attract investment. This could potentially make certain higher-cost projects profitable and create new markets for oil and gas companies.

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Some countries are already making moves. Saudi Arabia recently slashed the tax rate for producers of hydrocarbons; the rate for the largest producers fell 35 percentage points. Brazil is relaxing local purchasing rules both to gain more foreign investment and to lower costs, and Argentina has been luring companies to invest billions in return for reduced labour costs and extended state subsidies.

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While it is the right of each individual state to tax the exploitation of its natural resources as it sees fit, the rapid development of U.S. production is likely to push governments to compete even more strongly for exploration and development investments. This is a situation that bodes well for oil and gas production and service companies.

Oil supply continues to grow

As global oil supply continues to grow, large-scale, low-cost producers will grow their market share at the expense of higher-cost producers. The U.S. stands to be at the forefront of this shift, as LTO looks set to account for the largest increase in global oil supply over the next decade.

Demand is also expected to grow, albeit at a slower rate due to improved efficiency and alternative fuels progressively taking market share. This will effectively keep a cap on oil prices, which will, in turn, benefit low-cost producers.

A shift in global production could lead to a global re-think on how to manage natural resources as the market becomes increasingly competitive. Although Saudi Arabia, Russia and the U.S. are currently the top oil producers, a re-balancing of the supply has the potential to create new markets, new industry players, and new business opportunities.

Sources: IEA, EIA, BP, World Bank