The fundamentals of global oil and gas industry are undergoing many changes, including the rise of North American energy, geopolitical remodeling, natural gas becoming more and more significant, dilemma of the super "New Age project" in deepwater and arctic zones , as well as the emergence of new patterns of energy nationalism.

Changes in several key areas are reshaping the market structure of global oil and gas: the dominant of energy supplier is shifting; gas market is developing from regionalization into globalization, while the oil market is developing from globalization to regionalization; in the global energy structure, the market share of some fuel is increasing, and others is declining; rate of return fell, but the capital project expanded to "super" scope; open and close borders to response to geopolitical concerns and, as well as the changes of supply and demand conditions.

Global investors of oil and gas are concerned about the North American continent. The vigorous development of American shale gas, led its energy closer to self-sufficiency, which was simply unimaginable a few years ago.

The United States will be a energy-importing country instead of energy exporter, the ripple effect of this shift now is spreading to the Middle East, Russia and China. Some people worry about that the United States will enhance the energy independently, that may cause its isolationist and reduce its enthusiastic participation in international affairs.

This situation is impossible. New sources of energy supply and energy demand increasingly fierce competition (especially the Asia-Pacific region), will reshape the global geopolitical landscape, and creat a closer rather than the more alienated interdependence between nations.

Meanwhile, the market tends to cleaner fuels in the global energy structure, which is good news for natural gas, and as natural gas is developing globally, it will ultimately benefit the liquefied natural gas.

Increase of supply and demand is improving the alternative of natural gas, and stressed the indexed price of oil, forced it to consider convertible contract price flexibility and destination choice.

Under these trends, balancing supply and demand of the global oil and gas and adopting a new approach in the field to manage large projects, will lead to a more relaxed nationalist policies. Nationalist policy is a double-edged sword. It can protect the existing domestic market, but also will limit production growth prospects.

The global impact of American energy self-sufficiency

The breakthrough in the north American shale rock mining has the unprecedented importance to the United States. According to the prediction of the United States energy information administration, the United States is expected to be a net exporter of natural gas at the end of the decade. The transformation has far-reaching influence on the oil market as well.

No doubt the growing domestic energy production improved competitiveness of the United States. Outsourcing abroad is the trend of the development of the American companies for decades. But because the company seek to use low cost energy and high skill talented person, at the same time avoid intellectual property risk and the challenge of the extended supply chain management, "return" to the United States is becoming more popular with many companies.
　
Petrochemical companies were optimistic about the Middle Eastern countries with less cost a few years ago, while they are gradually returning to the United States now. The manufacturing sector that was devastated over the past few decades is also ready to face the energy-driven recovery.
　
The costs of Sino-US manufacturing will be essentially flat in 2015. Due to that the operating cost in America is reduced, and Chinese labor cost is gradually increasing. Also because of the increasing energy cost and the appreciation of the renminbi.
　
Given that the United States has enhanced its independence in the field of energy and economy, some commentators worry that the United States will move the focus to domestic issues, thus reducing the focus on foreign policy. Some other commentators believe that it means that the relatively balance of national interests of the United States in China, Russia, the Middle East and Africa has changed.
　
Energy recovery in the United States, has extensive influence on the country's geopolitical affairs. If the energy yield is higher than its own energy supply, it would reduce the dependence of America on Middle East energy supply.

It’s exaggerated to predict that the U.S. will evacuate from the Middle. The world oil markets are linked to each other closely. Whether or not the Middle East is still the major source of imported crude oil of the United States, once the oil supply in the Middle East disrupts, the United States domestic market will be affected.
　
Since the "Arab spring", the unrest in the Middle East is commonplace. Currently there is no one can replace U.S. to maintain the balance of power in the region, and the United States has the support from its Allies. So, in the foreseeable future, the United States will continue to participate in the Middle East.
　
American involvement in Middle East affairs, is also an important foreign policy issues, which is more significant than the rich energy supply in the Middle East. America committed to combat terrorism worldwide. As a party of "Nuclear Non-Proliferation Treaty", the United States actively negotiated with Iran on its nuclear program.
　
When the United States is reducing its dependence on Middle Eastern energy supplies, Asia and China’s dependence on energy supply in Middle East are strengthened.
　
In 1992, China became a net importer of crude oil. To 2004, Chinese crude oil consumption has reached 640 million barrels / day, and became the second largest oil consumer in the world. United States Energy Information Administration has predicted that sometime in 2014, China will become the largest oil importer in the world.
　
Chinese (including Hong Kong) amount of oil consumption, increased from 7.2 million barrels per day in 2005 to the current 10.5 million barrels per day, which is 12% of the world's oil demand. Chinese import demand will increase to 18 million barrels per day by 2040.
　　
In order to sustain economic growth, China needs to ensure energy security, namely to ensure sufficient, diversification, stable supply and reasonable price. So, if China wants to maintain vested interests, it must maintain the stability of the Middle East and protect the Malacca strait.
　
China began to adopt the energy policy of "go out" after became a net oil importer. Because of domestic supply growth stagnated and low economic benefit of pipeline, China had no other way, but only to find new overseas suppliers. So the Middle East has become its main source of oil imports. Today, more than half of Chinese crude oil imports from the Middle East.
　
Despite China's efforts to diversify sources of supply, but it is unlikely to reduce the dependence on the Middle East in a short period of time.
　
The United States energy information administration said that the Middle East oil exports to China are expected to be increased from 2.9 million barrels per day in 2011 to 6.7 million barrels per day in 2035, which will be 54% of Chinese oil imports. Chinese dependence on the Middle East and North American energy supply requires it to keep regional stability and establish stable trade cooperation partnership.
　
Although the gulf cooperation council is relatively stable, but since the "Arab spring", all political situations of the major crude oil supply countries of China in the Middle East are not stable.
　
It remains to be seen that whether the Russian new East Siberia - Pacific Ocean oil pipeline could become Chinese important new source of stable oil supply.
　
If energy is the only fatal to Chinese economic miracle, whether China will choose to be more directly involved in the Middle East's political, economic and even military affairs? Some people think that this is very unlikely, because the "non-interference in the internal affairs" is the most important principle of Chinese foreign policy.
　
Faced with the influence of rising Chinese and revitalized Russia in global affairs, and from the continued efforts of the United States to maintain its role as managers to balance the global power, we can feel the impact of the North American geopolitical energy revolution.
　
To meet its own energy needs, the United States reduced its energy exports share of GDP, while industry competitiveness is steadily improving. So the United States will become richer overall.
　
This will strengthen the capacity of the United States to maintain its overseas commitments, and the willingness of the world oil market management vital sea lanes, rather than providing a convenient means to disclaim these obligations.
　　
As for Russia, the increase of the North American production will force it to re-balance the oil and gas exports between Europe and Asia, in order to ensure that it can provide vital revenue for its economy in the future years. Especially the European gas market, its market share competition is intensifying, and may force all gas exporters to lower price overall in Europe. If the shale gas revolution in Europe followed, the European energy market may further reduce long-term natural gas imports.
　
For China, geopolitical influence is entirely positive. China can continue to use the naval supremacy of America, and the United States depended on British naval supremacy exactly the same in the 19th century. In addition, the supply of competing with the United States will be left to future resolved. Chinese shale gas revolution has been in the planning, and the problems associated with this can be forgotten.

The New Supply of Energy to Reshape the Geopolitics

OPEC and Russia has led the export environment of oil and gas as long as more than half a century. Today, new suppliers are challenging its dominance. In this process, the geopolitical situation is changing gradually. As demand center for hydrocarbons transfered to the Asia Pacific region, the competition of controlling over supply is being replaced by winning customers.

The change increased the diversity of supply and reduced the risk of interruption imperceptibly, so the importing country can get benefit from it.

28 percent of the total consumption around the world came from the export of OPEC in 2012, which was exactly the same as ten years before. Although OPEC is still the major power in global petroleum market, the product of the U.S. and other areas keeps growing. This is probably to restrain OPEC’s influence on oil price through the control over marginal product.

In the past, OPEC often cut down the top export limit of all members to confront overproduction and low price. However, the current internal dispute may restrain the ability of unified response. In 2013, Libyan Crisis, Iraq’s Technology Problem and the Sanction against Iran all severely reduced the export of these countries, but the production of OPEC always lingered over the agreed quota of 30,000,000 barrels per day.

The reason comes from the excess product of Saudi Arab, the United Arab Emirates and Kuwait, which makes up to the lost product. But this goes in the opposite way of what countries like Iran with limited productivity want; they hope to keep a high price with reduced production. OPEC members cannot achieve an agreement and the divergence may be much greater.

Another leading export country is Russia, whose dominant position (mainly in natural gas market) also confronts huge challenge. ‘BP Energy Forecast’ estimates that the European demand on natural gas is to increase by 17% in 2035 based on the promotion by environmental laws and regulations. However, the increase does not have to translate into the growth of import from Russia.

Russia may face serious challenges in the European gas market. Norway’s competitive price has made itself replace Russia becoming Europe's leading supplier in 2012. Also, supplies from the Middle East countries might pose a threat towards Russia’s dominance in Europe in the future.

To offset the slowdown in demand growth and increased competition in Europe, Russia is turning to the Asia Pacific region, especially China, and hoping to nail down these new markets by means of pipeline natural gas and liquefied natural gas; yet she’s definitely not alone.
Asia-Pacific countries, especially China, is the main customer of OPEC now. They bought 57% of the exports of crude oil from OPEC in 2012. Since the decline in the demand of the United States, the Asia-Pacific region will become more important for OPEC.

Changes in demand in Asia Pacific, driven mainly by China, increased the difficulty of predicting the dynamic needs. In 2013, the supply of OPEC satisfied most of China’s demand, but China keeps seeking for greater supply security through diversified investments. In recent years, China will continue to invest in domestic infrastructure projects in some oil-producing provinces. If necessary, China will constantly look for other suppliers besides OPEC and Russia.

The foregoing also applies to natural gas. China recently announced the natural gas purchase agreement of $ 400 billion signed with Russia's Gazprom. However, China is now increasingly focusing on portfolio diversification and choosing a variety of sources to obtain supplies, such as importing pipeline natural gas from the Central Asian countries.

The strategic importance of Asia-Pacific region has increased in accordance with the enhancement of its market capability, which means the protection of potential ‘throat point’ on the trade routes of oil and gas must be paid more attention to, such as Straits of Malacca between Malaysia and Singapore and the South China Sea – its territorial sovereignty is often claimed by some country hence leads to subsequent controversy - with escalating tensions. 

The importance of the South China Sea lies in not only strategic reasons but also its potentially huge unexploited oil and gas resource. New source of supply is to shake the global hydrocarbon market in the next decade. Output growth in the United States, Canada, Mexico, Brazil and Kazakhstan will reshape the global oil and gas market and the geopolitical situation. Traditional producing countries (mainly OPEC and Russia)'s dominance will be challenged, and these countries will be forced to compete actively in order to maintain its market share and influence.

From the demand side, the oil and gas market in the Asia-Pacific region accounted for most of the demand growth in the past decade and the upward trend is expected to continue. This grants the region as well as the countries of the region important strategic significance. Their ability to absorb new supply may exert great influence on global geopolitical situation and international trade. The way China, the main customer, will take to meet its growing energy need and strengthen its energy security is to cause a significant impact on the future development of the Asia-Pacific oil and gas market.

It has been estimated that China's oil and gas demand will grow significantly in the next decade, and that China may continue to tap new sources in addition to its traditional suppliers, such as the import of oil and gas from Central Asian countries, domestic production of shale gas and search for alternative energies like renewable energy, nuclear energy or hydropower, in order to achieve energy structure diversification.

The New Order of Global Energy Mix

Global Energy Structure is growing constantly; each time has one kind of dominant fuel, first charcoal, then coal. The past 20 years belong to petroleum, which took part in 36 percent of global energy consumption in 2012. Although global energy consumption has grown by 50 percent in the past 20 years, this ratio keeps steady.

Recently, certain events affected the supply and demand sides of energy, including falling demand in developed economies after the global financial crisis in 2008, the increase of oil and gas production from the United States shale gas producers, Japan's Fukushima nuclear power plant accident, social and political unrest in traditional energy producers (ie, the Middle East and Africa), price decline of carbon dioxide in EU emissions trading system and the exponential growth of renewable energy in Europe and Asia.

In view of the above events, balancing energy supply and demand has led the world to the brink of a new era, which will soon determine the new fuel leader in global energy structure.

In the West, the appearance of two new oil and gas supply regions has expanded the total amount of exploitable resource in global economy and promoted output growth.

For example, the global reserves production ratio (R / P) has increased to 55 years in 2012 from fewer than 50 years the late 1990s, which is mainly due to the development of unconventional energy in North America as well as the salt fields and heavy oil fields found in South America.

Growth of renewable energy and nuclear power in a particular region also changed the supply side of the energy supply and demand. To meet the stringent emission targets, the EU intends to continue to increase the share of alternative fuels in its energy supply portfolio.

United States and other developed economies are in the infancy of realizing energy self-sufficiency, and they will focus on advocating policies about environmental sustainability, such as promoting energy efficiency, promoting renewable resources and popularizing clean fuels in the transportation, thereby reducing oil dependence.
China has also announced the plan of reducing the share of coal to 46%in the energy mix in 2030 as well as increasing the use of clean energy.
Technical progress and maturity usually determines the competivity of fuels, such as the example in shale gas field. In addition, the ability to copy and transfer technology across regions is also a major factor affecting the competitive landscape, such as the development of shale gas in China.

Global energy mix began to favor natural gas and other clean fuels. In North America, natural gas is increasingly used for power generation, manufacturing and transport. Japan also plans to increase the share of natural gas in the energy mix, which is in line with the established practice of interrupting the use of nuclear power after Fukushima Daiichi nuclear accident.

In Europe, despite the recent twist of expensive renewable resources prompting the local consumption of coal in a short term, the market is still keen on the use of clean fuels. According to the European long-term commitment to clean energy, Europe will increase the share of natural gas in its energy mix, import more liquefied natural gas, lay a gas pipeline from Central Asia to North Africa and integrate the infrastructure of its natural gas pipeline to include more pipelines from the West to the east in order to abate the risk brought by dependence on Russian supplies.

Russia will continue to use natural gas to solve most of its energy needs, while the gradually economic-modernized Middle East is expected to shift to natural gas. Only the emerging Asian countries with coal as the main fuel will run counter to the large environment of "to the natural gas sprint" ("dash-for-gas")

With the natural gas market increasingly international, global oil trade tends to regionalization. OECD countries’ demand has been close to ‘peak point’ with its oil need estimated to rise by merely 2 percent between 2011 and 2040. With the supply rise in North America cushioning the falling spare capacity of Saudi Arabia, the North American oil market will continue to be contrary to the international market.

The United States will play the role of ‘production regulator’, who will provide a more stable environment for enterprise to make investment decisions as well as maintaining the stability of oil price. EU countries will import crude oil from Russia, the Middle East and North Africa in addition to domestic production.

Resource surplus and demand rise happened in different parts of the world, leading to a huge change in the oil and gas industry. Changes in supply and demand pattern will disrupt the order of fuels in global energy mix and present a pattern in favor of natural gas, which will have an impact on commodity prices, trade, policy and technology, thereby significantly affect the participants in the energy industry.

Manage superlarge "New Age project"

Superlarge oil and gas projects whose reserves exceed 1 billion barrels of oil equivalent can be broadly divided into three categories: traditional, new-age and non-traditional. Traditional items include territory, shallow and heavy oil projects. New-age projects consist of liquefied natural gas, gas-to-liquids (GTL), deepwater and Arctic projects. Non-traditional items refer to Canada's shale, tight oil and oil sands projects.

Due to the forecast of limited growth on traditional reserves and robust economic development early in this century, capital expenditure was promoted to new-age projects. Yet subsequent delays and cost overruns gradually dispelled the enthusiasm of investing in the new industry.

For example, Gorgon’s liquefied natural gas project in Australia had been previously estimated to cost $ 37 billion. But the later report revealed that the cost exceeded 40% and the delay was almost a year.

After the financial crisis, stable crude oil price and shrank global demand further challenged the development of new-age projects. In 2010, the actual global demand for oil and gas was 293 trillion British thermal units, which was 5% lower than the 307 trillion British thermal units forecasted by the United States Energy Information Administration before the crisis. Recently, the U.S. Energy Information Administration predicted that global oil and gas demand will increase to 310 trillion British thermal units in 2015, which is 10 percent lower than the forecast of the agency in 2006.

The final challenge of the new-age projects lies in the production surge of shale oil and gas in the United States and the rapid development of non-traditional items.

New-age items can get access to stuck and undeveloped reserves, but are accompanied with high technical complexity and risk. Harsh field operating environment (such as the Arctic region and the extreme deepwater area) need the support of cutting-edge technology, and the new site also brings a number of exploration and operational challenges.

The joining of shale exploitation projects has taken higher-risk new-age projects to a back seat, effectively reducing the risk range of entire superlarge project portfolio. Therefore, the average risk score of superlarge projects in shale era is expected to be flat with that in the late 1990s.

New-age project is still favorable for the growth of hydrocarbon reserves. However, its relatively high risk has posed a challenge towards the traditional project management strategy. Therefore, how to manage a mega project successfully in new era? Modern project management strategy enables management team to get knowledge of project dynamic, constantly get informed of and adapt to changing external factors. This strategy focused on four aspects:

Upfront investment: inject more resources to project plan, get companies know about mega project dynamic, improve predictability and reduce operational failure;

1. Streamlined project management: This method focuses on redefining the project requirements at the current position to achieve a breakthrough;

2. Comprehensive Project Delivery: The Evolution of this method goes beyond the traditional contract model which focuses on the two parties and everyone - contractor relationship. It absorbs all project participants into the project team, including owners, engineers, contractors and major suppliers.

3. Operational Excellence System (SOE): The primary goal is to identify problems in time through a real-time insight into the status quo hence implement coping strategies to enhance project performance.

Because of cost overruns and delays, stable oil price and competition coming from lower risk unconventional alternatives, superlarge oil and gas projects (mainly new-age projects) are going through a tough time.

Nevertheless, due to the reduction of conventional oil field and the slowing growth of shale, new-age project is still an integral part of the developing strategy of oil and gas industry in the long term.

If oil and gas companies can get the benefits from new-age projects, the demand for modern project management strategy will continue to grow. Each new-age mega project is facing an unique challenge, hence no universal method but many constantly emerging guidelines.

Advanced industry practice shows that the modern mega project policy should at least include strengthened preliminary engineering and planning, flexible project monitoring and evaluation methods, enhanced integration and cooperation between project participants, as well as emerging technologies, tools and the system of experience knowledge systems, to promote operational excellence.

Greed, fear, pride

The origin of energy nationalism

Resource nationalism is actually the result of three desires in human nature collide with each other. To turn resource wealth into a desire for money is greed. Since modern society cannot do without energy, the desire to ensure energy security is fear. And for national development, the desire to maintain the country's energy sovereignty is pride. Each country tries its best to resolve these issues in confrontation and conflict at some time, which reflects the changing of national strength, local development objectives and priorities of the country.

After the oil crisis of the 1970s, modern resource nationalism (at least in the oil and gas sector) has undergone enormous changes. Today, conventional oil and gas reserves are almost entirely controlled by national governments. All oil-based economies in the Middle East is so, Russia, Indonesia, Malaysia, Mexico and Venezuela as well. In fact, 89% of the known conventional resources are now restricted.

Many countries and regions with resource shortage, such as South Korea and China, have set up their top national oil companies to ensure energy security for growing economy against supply disruption. 

With the focus turned to unconventional basins, the development scale of many international oil companies have been falling, while production costs have been rising. Overall, the national oil company can get easier access to capital, resources and market at the cost less than that of international oil companies by virtue of its scale advantage.

National Oil Companies have been taking advantage of its strengths in the implementation of large capital projects and deployment technology to get resources. Because of the rise of global oilfield services (OFS) with its R & D program and the appearance of business models, this model is now facing difficulties.

In the next few years, these patterns may be further changed. Traditional importing countries (such as the United States importing oil and gas and Brazil importing oil) are becoming exporters. On the contrary, some previous exporting countries such as Indonesia and Malaysia are being transformed into importing ones.

There are three major macroeconomic factors behind these changes:

1. Technological advances helped the application of hydrocarbons that had been regarded as unobtainable in the past, which turned an importing country into an exporter and changed its role in the world.

2. The improvement and energy efficiency and changing lifestyles are affecting the demand for petroleum products in developed countries. With large emerging economies (such as China and India) gradually solving the air quality concern, these economies may also turn a similar trend.

3. The rise of Asian economies driven by population growth is changing the global demand pattern which has lasted for four generations. The absolute size of these countries affects its own demand for hydrocarbons.

Three major macroeconomic factors are creating new energy nationalism and rebalancing the drivers like greed, fear and pride. Technology is opening up new unconventional resources in shale and deep ocean, increasing supply choices and giving birth to new exporters in this process.

Energy efficiency is leading to a slowing demand growth, especially in developed economies, and the same effect is to be exerted on newly emerging economies someday which will further expand the supply of hydrocarbons. Like gravity, population growth and middle class expansion is leading the oil and natural gas to a large emerging economy of Asia.

Overall, greed and fear get strengthened while pride is weakening. The greed of both previous and emerging exporters towards the market and the fear of countries with huge demand for energy security is driving a new energy nationalism.

Meanwhile, former fearful nations are getting more confident and courageous with newly discovered natural resources. Yet countries with energy shortage have to reduce their pride in order to improve energy security and alleviate sense of fear.

Therefore, many governments with currently closed markets will gradually open their markets, at least allowing more competition in its territory.

For more information, please visit Zoranoc's official website:www.zoranoc.com

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