Daniel Yergin, IHS vice chairman and Pulitzer Prize-winning author of The Quest and The Prize, gave the keynote address at the European Petrochemical Association's (EPCA) 49th annual meeting in Berlin on October 5, 2015. Here are the key points from that address.
Shale gale growth
The advent of shale gas and oil in North America has had a very large positive impact on the world economy, in terms of energy supply and costs. “The energy position of the globe looks much better" than it did only a few years ago, Daniel Yergin noted. The emergence of shale was one of the main triggers of the collapse in oil prices since mid-2014, which has also improved the feedstock position of the European petrochemical industry in ways that were not anticipated a year ago. For now, the oil price currently appears impervious to the many geopolitical dangers around the world, but this could change very quickly.
The world has entered a new era in energy terms, with growing global supply surpassing demand from emerging economies as the main influence on markets, Yergin told EPCA delegates. "We have moved from the defining theme of the oil market being the growth of the emerging markets to its being the dramatic growth of shale," Yergin said.
He pointed to the robust emerging market growth in the 2004 to 2014 timeframe—China's economy, for example, expanded by 2.5 times while the world economy expanded 27 percent and Europe, by only 10%. This economic expansion drove increased demand for oil and petrochemicals. Oil prices rose to levels of approximately $100/bbl in the early part of this decade. These factors fed fears of a shortage and made rising costs a major issue for consumers. "But, during that period, shale was coming, and it has transformed the energy scenario," Yergin said.
Growing shale-based energy supplies, combined with a cooling of the main emerging economies (particularly China), together with OPEC's decision not to cut output, have pushed oil prices down "to levels below what many anticipated," Yergin said. "Right now, there is a historic shift from limited supply and strong demand to ample supply and weaker demand, partly because of a disruptive technology (fracking for shale oil and gas)," he said. The development of fracking technology, initially for gas and then for oil, has resulted in an almost doubling in oil production in the United States since 2008, and an almost 50 percent hike in natural gas production over the last decade, Yergin said.
Geopolitical risks and lower oil price
Geopolitics have historically had a huge influence on the price of oil. And the world today faces big geopolitical risks, ranging from flashpoints in the Mideast, such as Iran, Iraq, Syria, and Yemen, to the migrant crisis in Europe and tensions between the West and Russia. But, because of ample supply, these risks are currently not factored into the price of oil, and thus are not offsetting the fall in the oil price to its current low levels, although an unexpected turn of events could cause this scenario to change, Yergin said.
Low prices have caused the oil industry to slash costs with estimated budget cuts averaging 10% to 15% among the major companies, Yergin said. "Oil projects will be delayed, reviewed, postponed and cancelled," he said. But cheap, plentiful oil has brought big benefits to the worldwide petrochemical industry in 2015, particularly in Europe.
Europe has shale gas potential, but political obstacles prevent its development, he said. IHS research indicates that by the mid- 2030s Germany could be getting 35 of its natural gas from domestic shale gas produced from non-sensitive areas, equivalent to current import levels from Norway or Russia.
“Currently, the impact of US shale gas is pervasive, with big implications for petrochemicals," Yergin said. He cited IHS Chemical’s estimate of the more than $100 billion in scheduled investments in what he called "first wave" of petchem projects in the United States "The United States will remain in a very competitive position in petrochemicals for a long time," Yergin said. The potential “second wave” is going through a process of assessment.
European shale future
The petchem feedstock position of Europe, where naphtha remains the dominant raw material, has also improved with the fall in oil prices, but this benefit is likely to erode over time, Yergin said. “The oil collapse dividend for petrochemicals in Europe will be an asset that fades over time versus natural gas-based petrochemicals in the United States," he said.
But, overall, he pointed to continued growth for petrochemicals worldwide. He cited IHS Chemical research that forecasts that the worldwide petrochemical demand will be 40% bigger overall in 10 years than it is today. “The world needs what the petrochemical industry makes and it will need much more in the future,” he told the EPCA delegates.