Energy prices tend to be highly volatile and are expected to continue their volatile nature in the future. Economic problems in Europe, the USA, and other areas resulted in the price of oil falling to as low as $78 dollars a barrel in May 2012, but then that price increased to more than $100 by year-end 2012. Crude demand in the USA, which accounts for 21 percent of global demand, declined around 2.6 percent in the first half of 2012. Demand in Europe, which accounts for 16 percent of the world’s use of oil, has declined as well. China, the world’s second largest consumer of oil, reported in mid-2012 the slowest growth for oil in more than 20 months.
For ExxonMobil, a $1 change in the price of oil produces a weighted average effect of $350 million in annual after-tax earnings on upstream production. A $0.10 change in gas would have a $200 million annual after-tax effect on upstream production. Some of the cited concerns for the current volatility in the price of oil include the USA, Europe, and China offering extra stimulus packages to spur the economy; sanctions on Iran, which has threatened to close the Strait of Hormuz where 20 percent of the world’s petroleum is shipped; concerns about Iran and Israel’s geopolitical relationship; and reduced production concerns in the North Sea. The Organization of the Petroleum Exporting Countries (OPEC), which accounts for nearly 80 percent of the world’s oil reserves, has kept production unchanged recently, but Saudi Arabia is trying to negate the impact or the embargo on Iran by increasing its own output. Possibly reducing some oil volatility in the future is the fact that the largest non-OPEC area currently is in onshore shale in the USA and Canada along with traditional drilling in North America. Given the current price of oil, extracting oil from shale sand remains expensive and produces lower margins than traditional drilling, but this problem is fading as increased technologies emerge and oil and gas prices resume their upward trends.
Unconventional Fuel Sources
Accessing so-called unconventional resources such as shale, rock, and sands for oil was impracticable for years because of lower demand and unprofitable because of lower oil prices and the expense of extracting the product. However, with increasing demand, rising oil prices, improved technology, and competition for traditional oil fields, tapping such energy sources is a new avenue for growth among petroleum companies today. One of the largest sources of this energy is in North America, with natural gas being derived at a high rate in recent years that current prices of gas have plummeted as a result of oversupply. Many firms have engaged in mergers and acquisitions for shale, with Exxon’s acquisition of XTO energy being a notable example. Currently however, with the low prices for natural gas, many companies are drilling the same shale, rock, and sands areas for liquid oil instead of natural gas.
Notable hotbeds for exploration include the Eagle Ford, Bakken, and Permian Basin. Eagle Ford is located in south Texas and is considered the hottest area in North America producing higher liquid content than traditional shale. Competition in Eagle Ford remains high with Norway’s Statioil ASA, India’s Reliance Industries, and China National Offshore Oil Corp. all entered with billion-dollar deals in 2011. As of 2012, there were 211 rigs operating in Eagle Ford.
Located in Montana, North Dakota, and Saskatchewan, the Bakken Shale formation is the second-most concentrated shale region in North America. The U.S. Geologic Survey estimates the region is capable of producing up to 4.3 billion barrels of oil. Companies such as Hess and Marathon are increasing their presence in the region. As of 2012, there were 160 active rigs in the Bakken formation.
The Canadian oil sands have also been economically feasible in recent years and could potentially make Canada one of the world’s largest oil producers. French-based Total SA has invested $3 billion in the Athabasca oil sands in Alberta, and Devon Energy and BP have a joint venture to develop properties in the region. Sinopec and China National Offshore also have invested in the area with Sinopec investing more than $8 billion alone to acquire rights to sand deposits.