IEEJ: December 2011 All Rights Reserved
Special Bulletin
A Japanese Perspective on the International Energy Landscape (68)

December 5, 2011

Continuing Expansion and Future Direction of U.S. Oil and Gas Production
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
When I toured Europe and the United States from November 27 to December 4, I had
opportunities to exchange views with experts on oil, gas and nuclear issues on a wide range of topics.
Regarding Japan, topics included energy policy reform, the possibility of restarting of nuclear
reactors, and additional oil and LNG demand. I and these experts discussed a very wide range ofother topics including major countries’ nuclear energy development after the Fukushima nuclear
crisis, Iran’s nuclear arms development, the Middle East and North Africa situation after the “ArabSpring”, its impact on international energy markets, the benchmark West Texas Intermediate crude
oil futures price’s renewed rise above $100/barrel and other energy price hikes and their background,natural gas development in Russia, Australia and the Middle East, and relations between oil prices
and financial/speculative factors.
I then paid particular attention to changes in U.S. energy supply and demand, including oiland natural gas supply and demand. The changes mean the expansion of unconventional resources
development and new events in the United States, which have exerted influences on oil and gas
supply and demand, nuclear energy development, and the conditions of other various energy sourcesin that country. These changes could also have influences on international oil and gas supply anddemand.
China has replaced the United States as the world’s largest primary energy consumer. The
two countries’ gap has been expanding due to a difference between their economic growth rates. As
far as oil and gas as the most internationally traded energy commodities are concerned, however, theUnited States has remained as the world’s largest market. Its gap with China in oil and gas
consumption is still large, though narrowing. As a matter of course, major changes in the largest oiland gas market in the world are very significant when the international energy situation isconsidered.
As for the substantial expansion of unconventional gas production, the “Shale GasRevolution” has become a buzzword. Advanced technologies including the combination of hydraulicfracturing and advanced horizontal drilling techniques have dramatically improved the economic
potential of shale gas and other unconventional gas resources, leading to a substantial expansion indomestic gas production. As a result, the U.S. natural gas supply/demand balance has eased,
contributing to an easier global LNG supply/demand balance and even an LNG supply glut. As theU.S. supply/demand balance eased, natural gas prices have slipped below $4 per million BTUs. A
key point in our discussions was what would happen in the low-price environment.
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IEEJ: December 2011 All Rights Reserved
In the U.S. energy market where market principles can work easily, energy prices tend toexert some feedback effects on both supply and demand. In the low-price environment, demand
expands as a matter of course. The power generation sector’s expansion of gas consumption has so
far been conspicuous. Recently, however, the potential expansion of industrial gas consumption has
been under consideration. Petrochemical companies could pay attention to the low gas prices andconsider using natural gas for their operations. New demand could thus emerge for gas. Future gas
demand may attract attention in relation to domestic industrial and employment problems as well as
energy supply/demand problems. We may have to keep close watch on relevant future developments.
Meanwhile, the United States can choose whether to domestically consume or export gas.
Paying attention to gaps between lower U.S. domestic gas prices and higher Asian levels, variouscompanies are seriously considering exporting LNG. Given firm Asian demand, the United States isexpected to continue considering LNG exports as a key theme. In this respect, we may have toclosely watch future developments regarding U.S. domestic gas demand and prices. On the otherhand, there are various opinions on how a continuation of low gas prices would affect gas
development and supply. While technological advancement has served to cut development andsupply costs, the current low prices have failed to provide incentives for expanding gas supply.
Various views have emerged on whether low gas prices could be sustainable amid theabovementioned demand-expanding moves as well as the lack of sufficient gas development
incentives.
In addition to unconventional gas development that has attracted global attention in thewake of the U.S. revolution, unconventional oil development may become a next major topic. As isthe case with gas, shale oil and other unconventional oil production has rapidly increased on thestrength of technological advancement (and oil prices sustained at high levels). An oil boom hasreportedly emerged at the Bakken shale oil formation around North Dakota that has led theproduction expansion and at the Eagle Ford shale oil formation in Texas that is expected to expand
production from now on. Upbeat forecasters project that unconventional oil production in the UnitedStates may increase by 2.5-3.0 million barrels per day by 2020. But the expansion of unconventional
oil production in the United States has just started, with many factors remaining uncertain. At mylatest meetings with U.S. and European energy experts, views were divided over how far theproduction would expand over a medium to long term. But an important point is that the production
expansion has actually begun and is reaching a point where it is almost certain to continue.
Given that one of the U.S. energy policy objectives has been the reduction of dependenceon oil imports, the domestic oil production increase is significant for the United States. Particularly,
it is important that unconventional oil production has attracted attention and has become a target ofexpectations as a domestic oil output expansion means at a time when offshore oil production
stagnates on last year’s massive oil leaks in the Gulf of Mexico after continuing to expand amid anoverall domestic oil output decline. An upward revision of U.S. oil output (in addition to a future fallin U.S. oil demand) means a decline in oil import demand from the United States, the largest oil
market in the world, becoming a development that OPEC and other oil exporting countries cannot
ignore. Relatively, the presence of the Asian market where demand is continuing to expand willgrow more important for these oil resource-rich countries.
2IEEJ: December 2011 All Rights ReservedU.S. oil and gas output is most likely to expand thanks to the promotion of unconventional
oil and gas resources development. Various scenarios are conceivable with regard to the pace andsize of the expansion. At my latest meetings with U.S. and European energy experts, some indicatedthat the United States could replace Russia as the world’s largest producer of oil and gas combined(in terms of oil equivalent basis) by 2020. Unlike Japan, the United States is a major energy powerwith rich and deep energy resources. We need to continue to pay close attention to the US energy
supply/demand problems and policy.

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