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World Energy Outlook and Potential Impact on Nigeria’s Petroleum Industry

Oil InstallationBeing a text presented by the Chairman/ Managing Director, ExxonMobil Companies in Nigeria, Mr Mark Ward, at the 10th Aret Adams Annual Lecture Series, organized by the Aret Adams Foundation. Excerpt:

Mobil Producing Nigeria is honored to join the Aret Adams Foundation for what has become a very important date in the industry speaking calendar. I commend the Board of the Foundation for sustaining its founding vision, and providing this platform that brings industry leaders together to address critical issues associated with our industry.

Our topic, “World Energy Outlook and Potential Impact on Nigeria’s Petroleum Industry”, is probably as relevant as it will ever be to Nigeria’s energy industry, and all of us sitting in this room.

ExxonMobil’s Outlook is a comprehensive and detailed assessment of the energy landscape over decades.  It is part of the foundation on which we have built our business. The Outlook to 2040, as with past analyses, is based upon a combination of public and proprietary data covering more than 100 countries.

Global outlook
We look at world demand, the types of energy needed to meet that demand and other factors that might impact energy supply and demand on a global, regional and national level. These include things like expanding prosperity among a growing world population, the cost and availability of various forms of energy, the development and use of new technologies, and government policies and regulations.

More recently, we have shared it beyond our Board Room to public audiences around the world to broaden understanding of the energy challenges and opportunities all of us face in the years ahead.  This is even more important for an energy rich, – and energy dependent – nation such as Nigeria.

It is important to understand the links between population growth, economic progress and the amount and type of energy used around the world.  Growing populations advance economically over time and seek better living standards, which in general leads to increased energy use.

We expect that by 2040, global population will reach 8.7 billion, and the Non OECD will make up 85 percent. Global GDP is expected to increase at about 2.9 percent a year from 2010 to 2040, led by the rapidly expanding economies of the Non OECD.

Energy demand
The point here is that energy demand, projected to grow significantly through 2040, will be driven mainly by population and economic growth in the Non OECD.

Since 2010, demand for energy from the United States, Europe and other OECD members is being moderated as their economies reach a plateau. Total demand increases around 35 percent from 2010 to 2040, or about 1 percent per year on average.

Looking at trends by energy type:
Oil remains the largest single source of energy. Its use will grow around 25 percent. Oil, natural gas and coal provide approximately 80 [82% 2010, 77% 2040] percent of total supplies. The most significant shift occurs as natural gas displaces coal as the second-largest fuel by 2025. Gas will grow faster than the other major fuels, with demand up 65 percent by 2040.

This is important for an oil and gas resource-rich country like Nigeria and provides continuous incentive to implement competitive policy regimes.

By 2040, we expect Asia Pacific market will account for close to 45 percent of demand, up from just 20 percent in 1980.
Here is some perspective on how the recent surge in North America’s domestic production of oil and gas might impact the global market.

Through expanding application of horizontal drilling and hydraulic fracturing, the US is tapping “unconventional” oil and natural gas found in shale and other “tight” formations, leading to a dramatic shift in North America’s demand and supply outlook over the period.
We expect North America oil demand to fall, primarily as a result of improved efficiency in transportation. This trend, coupled with increases in liquid supplies being developed in the U.S. and Canada today, is expected to lead to a significant decline in net import requirements (shown in the dark green-hatched area).

In fact, around the year 2030, we expect North America to go from a net importer to potentially a net exporter of oil and oil-based products. The point here is that on balance, North America is likely to move from a net import position to a net export position by about 2025.

Impact on Nigeria
In 2011, Nigeria exported about 2.3 million bbl/d of crude oil. The US is the biggest importer of Nigeria’s crude, with 34% of export volume. Europe (30 percent) and Asia (17 percent) follow closely.

However, exports to the US from Nigeria have declined in recent times, in favor of domestically-produced crude. In 2011, US import of Nigerian crude decreased in volume overall, with the trend sustained in 2012. Reported shipping schedules for this year show that Nigeria cut exports in February to 67 cargoes (about 2.19 million bpd), compared with 75 cargoes for January 2013.

So, will the changing supply dynamics in North America impact Nigeria’s production? Is the supply market constricting?
Not necessarily, as demand remains strong in China and India. But we expect competition will tighten as exporters, including Nigeria, seek new markets outside of the US.

However, as we noted previously, the US is projected to be one of the world’s largest producers by 2020; driven by faster than expected development of shale oil in North America.

According to the EIA, US oil production in 2012 exceeded seven million barrels a day – the first time since 1993.
US oil imports are expected to fall by more than 4MBD, compared to current 10MBD imports. The US will be a net exporter of oil by 2030.

In view of this emerging scenario, where potentially, the U.S. competes for the same export market, with cheaper shale oil, the obvious question we should ask is, “‘what should Nigeria be doing today”?

This is important, as the oil and gas sector currently accounts for over 95 percent of Nigeria’s export earnings and about 40 percent of total revenues.

Natural gas discovery, consumption
Let’s take a look at natural gas, where North America’s shale boom has had a more dramatic global impact.

The remaining global natural gas resources and projected demand, as estimated by the International Energy Agency is more than 28,000 Trillion Cubic Feet (TCF). But gas is an abundant, wide-spread resource.

The gas resource is split into conventional and unconventional gas, with unconventional gas making up about half the estimated remaining resource. In North America, it is higher – about two-thirds of the remaining resource.

Access to North America’s unconventional gas has shifted global LNG market dynamics, with new technology spurring domestic production at significantly cheaper rates. This will almost eliminate the need for imports into North America, and make more LNG available to Europe and Asia Pacific.

We note also that global consumption – shown in blue bars – is projected to increase by over 50 percent from 2005 through 2030. This demand will be mainly in Asia, which takes over the top spot from North America. Non-OECD countries are expected to account for more than 70 percent of total consumption growth and production of natural gas over the forecast period.

One fact is now evident: the US will likely not import LNG over the next decade. According to data from the EIA, this is equivalent to losing about 23% of projected global LNG market. We’ll discuss why this insight should be of interest to Nigeria in the next slide.

Let’s review some interesting data from the Energy Information Administration (EIA).
According to EIA, Nigeria exported 17.97 million metric tons of LNG in 2010, making Nigeria the 5th largest LNG exporter in the world and the largest LNG exporter in the Atlantic Basin. Europe, with 67 percent, is Nigeria’s biggest export market. The U.S. imported 0.86 million metric tons of Nigerian LNG (5%), or only 1 percent of total U.S. LNG imports.

So, while we see that the U.S. is not a significant export market for Nigerian LNG, the real danger to Nigeria lies in potential U.S. export of her shale gas to global LNG market.

Indeed in 2011, the impact of the U.S. shale gas boom was not felt by Nigeria because more of the country’s LNG exports went to Japan, where Nigerian exports tripled due to increased LNG demand following the Fukushima nuclear accident.

However, we know that quite a few countries (notably Australia and China) are interested in applying the technology which has allowed North America to unlock unconventional gas.

Will these countries achieve the same success as the U.S.?
While current forecast is that similar commercial production remains some years away, the point to note is that interest in unconventional production is growing, even in Europe, Nigeria’s biggest LNG market.

It is worth pointing out that Nigeria’s share of global LNG market dropped in 2011, from 10 percent to 7 percent, mainly due to lack of recent capacity increase and rising production from Qatar and Australia. Nigeria’s estimated LNG production capacity is currently 22 million metric tons per year, and no major increase is expected to come online before 2015.

With Nigeria’s proven natural gas reserves put at an estimated 180 trillion cubic feet as of end 2011 – the ninth largest in the world – the country needs to open up her market and focus on being a competitive, low-cost, high-reliability supplier to the global market.

Global changer
It would be worthwhile examining a number of factors that have contributed to what could possibly be a global game changer in our industry:

First, there was availability of a huge prime resource base. Second, there was expanded access to this resource, with clear resource rights to investors. This allowed for investment in, and application of appropriate technology. Third, you had a system that tried to avoid arbitrary and punitive tax policies.

Fourth, clear regulatory system that not only supported safe development and production, but responded to industry push to expedite the permitting and construction of pipelines and other infrastructure necessary to get these new energy supplies to market.

These conditions, mostly absent in other places, came together at the right time and created what we are witnessing today.

Going forward
Nigeria must recognise that a significant resource shift has turned a key trade region into possibly a direct competitor, and avoid creating barriers with potential to make her industry uncompetitive for investments. Coupled with the emergence of other resource basins in East, Central and South African countries, Nigeria must work to maintain her place as a key contributor to global energy supply.

The Government’s focus on restructuring the industry through the Petroleum Industry Bill (PIB) is therefore timely, but it must be designed and implemented correctly.

This means:
?    Globally competitive fiscal terms, to attract capital
?    Stable and fair business investment climate with appropriate protections
?    Ensuring that fundamental issues such as funding limitations and operations inefficiencies are addressed.
?    Developing a completely thought-through transition, to avoid major disruptions.

In conclusion, I would like to leave you with a summary of our thoughts:

Population and economic growth in non OECD countries, projected to grow significantly through 2040, will drive energy demand/use.

Oil and natural gas will remain the largest single source of energy in the foreseeable future.

The recent boom in North America’s domestic production of unconventional oil and gas has changed global supply and demand market; other countries are seeking to apply the technology

Nigeria needs to develop clear regulatory and competitive policies and make plans around a potential scenario where the U.S. and new players from Africa compete for the same export market.

Competition is global and requires more than resource to attract and maintain investment.

We hope that by sharing this Outlook, we can all help contribute to making informed decisions about the nation’s energy future.

Distinguished participants, ladies and gentlemen, once again, I thank you all for your kind attention.

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