Industry analysts say the US shale gas revolution “virtually guarantees” the end of oil’s hegemony as a transportation fuel, which could eventually lead to lower crude oil prices.
Until recently, despite the push towards green fuel blending, oil remained the fuel of choice for transportation because there was a lack of alternatives to oil products such as gasoline, kerosene and diesel.
However, the US shale gale, which has led to lower gas prices across the country, is likely to result in increased uptake of both compressed natural gas and liquefied natural gas as transportation fuels, according to Citi’s Ed Morse.
“New trends, each building momentum and reinforcing one another, virtually guarantee that natural gas will make inroads into petroleum’s monopoly hold of the transportation fuel market,” Morse says in a research note.
Citi analysts say the process is likely to be aided by initiatives including governments, especially in emerging economies, putting a cap on natural gas prices and pricing carbon.
US natural gas prices hit a 100year low of less than $2 per million British thermal units last year, but have since rebounded to around $3.99/MMBtu.
However, prices still remain significantly lower than the highs of above $15/MMBtu, hit in 2005.
According to Citi forecasts, the gas for oil replacement is likely to reduce global oil demand by 3.5 million barrels a day by 2020, or representing a reduction higher than current oil production in Iraq.
“The improvement in global fleet efficiency and the substitution of natural gas for oil could be enough to put in a plateau for global oil demand by the end of this decade,” the research note says.
Already, the fuel conversion is underway, with Warren Buffet’s Barrington National Santa Fe testing natural gas instead of diesel in its trains.
While fuel substitution due to shale gas will pressure oil prices, the commodity appears to be getting crushed under its own weight, with the new technological barrels being extracted at higher costs.
According to research by Sanford C Bernstein, non-OPEC marginal cost of production went up last year to $US104.50 a barrel, up more than 13% from $US92.3 a barrel the year before.
The Bernstein research notes the shale revolution in the US has come at an “unprecedented” rise in the marginal cost of oil production in the country with costs last year reaching $US114 a barrel compared with US$89 a barrel in 2011.
The rising production costs in the US shale and Canadian tar sands are especially worrisome as 40% or much of incremental oil production capacity over the next five years is likely to be sourced from North America with the continent also accounting for about 65% of non-OPEC supply growth in the next five years.
While the higher marginal costs may put a floor on energy prices, it will also put a lid on company bottom lines.
As the Bernstein research note puts it, the rising production costs represents the “dark side of the golden age of shale” with the marginal cost of oil production up by about 250% in the past 10 years, reaching a record of $US104.50 a barrel in 2012, from just under $US30 a barrel in 2002.
Equally, cash costs during the same period have gone up to $US44.20 a barrel in 2012 from $US9.70 a barrel in 2002.
While the shale revolution itself has unleashed bountiful supplies, it also has capped the prices at a time when production costs have soared.
“Net income margins in the sector are now at the lowest level in a decade,” the Bernstein note points out.
“This is not sustainable. Either prices must rise or costs must fall.”
