Oil and gas consumption still rising despite environmental pressures

The price of oil is back around $60 a bar­rel and nat­ur­al gas is pro­ject­ed to pro­vide 45 per cent of pow­er gen­er­a­tion by 2040. Rebound­ing mar­ket fun­da­men­tals, quests for pro­duc­tion inde­pen­dence and pro­tec­tion of mar­ket share, as well as geopo­lit­i­cal ten­sions, con­tin­ue to dri­ve both opti­mism and scep­ti­cism with­in the indus­try. With renew­able ener­gy pro­ject­ed to account for the major­i­ty of new gen­er­a­tion capac­i­ty to 2050, what does the future hold for oil and gas?

The cur­rent crit­i­cal impor­tance of oil and gas to the ener­gy mix is unde­ni­able, but as the mar­kets con­tin­ue to evolve, it’s impor­tant to under­stand what’s dri­ving changes in both demand and sup­ply. Ener­gy demand can be effec­tive­ly split into three areas: elec­tric­i­ty, where the biggest source remains coal; trans­port, still pre­dom­i­nant­ly oil based; and heat­ing, which is cur­rent­ly dom­i­nat­ed by gas. As the demand pat­terns change for these sec­tors, so does the indus­try over­all.

Guy Doyle, chief ener­gy econ­o­mist at Mott Mac­Don­ald, points out: “Uncon­ven­tion­al hydro­car­bons have already changed the glob­al dynam­ics for oil and gas mar­kets, led by devel­op­ments in explo­ration and pro­duc­tion tech­nolo­gies applied in the US.” Sup­ply no longer seems to be a con­cern.

Accord­ing to the Inter­na­tion­al Ener­gy Agency (IEA) World Ener­gy Out­look 2017, over­all ener­gy demand is set to expand by 30 per cent between now and 2040, at around 1 per cent a year, with the glob­al econ­o­my grow­ing at an aver­age rate of 3.4 per cent.  Over the longer term, the IEA fore­sees that under the exist­ing and announced poli­cies, oil demand growth will con­tin­ue into the 2040s.

As Las­z­lo Var­ro, IEA chief econ­o­mist, says: “When you tell a sto­ry about the future, unavoid­ably you make assump­tions. Over the longer term, polit­i­cal and tech­no­log­i­cal ques­tions mul­ti­ply.” Under its Sus­tain­able Devel­op­ment Sce­nario, where reg­u­la­tion is imposed to achieve deep emis­sion cuts, the IEA expects to see oil demand peak in the 2020s and be in decline by more than a mil­lion bar­rels per day by the 2030s.

A fall in oil demand is expect­ed to be dri­ven by growth in trans­port elec­tri­fi­ca­tion and effi­cien­cy improve­ments in inter­nal com­bus­tion engines

Mr Var­ro says the ener­gy mix will under­go a sig­nif­i­cant shift, with the lead tak­en by nat­ur­al gas, by the rapid rise of renew­ables and ener­gy effi­cien­cy. Con­tin­u­ing decline in ener­gy inten­si­ty, due to the chang­ing struc­ture of the glob­al econ­o­my, is like­ly to have a major impact on ener­gy demand, he adds.

A fall in oil demand is expect­ed to be dri­ven by growth in trans­port elec­tri­fi­ca­tion and effi­cien­cy improve­ments in inter­nal com­bus­tion engines, pre­dom­i­nant­ly in per­son­al vehi­cles rather than logis­tics, ship­ping and air. With today’s 800 mil­lion per­son­al vehi­cles pro­ject­ed to hit two bil­lion by 2040, the speed of elec­tri­fi­ca­tion will make a huge dif­fer­ence.

Pre­dic­tions of peak demand are depen­dent on many vari­ables, includ­ing invest­ment inter­ests, mar­ket size and gov­ern­ment pol­i­cy. Stephen George, chief econ­o­mist at KBC, says: “Every­body uses dif­fer­ent sce­nar­ios, and these strate­gies need to be resilient and robust. KBC pre­dicts no peak for oil, only a plateau at around 2040 of around 110 or 111 mil­lion bar­rels per day. It doesn’t show a peak and drop by 2050, which is the fur­thest most pro­jec­tions go.”

While he accepts that elec­tri­fi­ca­tion will have an impact on oil demand, Mr George doesn’t believe that elec­tric vehi­cles will be the solu­tion every­where. In the Unit­ed States there will be cul­tur­al issues to over­come, in India there will be infra­struc­ture chal­lenges. He adds: “Our view is a slow­ing down of oil demand, retreat from coal and mas­sive growth in nat­ur­al gas. Petro­chem­i­cals will grow as fast as oil demand for pow­er drops.”

Nat­ur­al gas use is expect­ed to increase by 45 per cent to 2040 in the pow­er sec­tor. At the same time nat­ur­al gas has a more diver­si­fied set of appli­ca­tions than renew­ables, par­tic­u­lar­ly for high-tem­per­a­ture indus­tri­al use and trans­porta­tion. Mr Var­ro points out that around half of indus­tri­al heat use is high tem­per­a­ture and nat­ur­al gas also has an impor­tant role in house­hold ener­gy con­sump­tion. In Chi­na, for exam­ple, nat­ur­al gas is ben­e­fit­ing from air pol­lu­tion reg­u­la­tions and its liq­ue­fied nat­ur­al gas imports were up 42 per cent last year.

One con­cern of increas­ing impor­tance is strand­ed assets. Mr Doyle says: “On a pure ener­gy cost basis, renew­ables will be cheap­er than new gas or coal gen­er­at­ing plant.” Mr Var­ro points out that a few years ago, when cap­i­tal invest­ment in the oil and gas indus­try was around $800 bil­lion a year, this might have been a fair crit­i­cism, but the invest­ment cycle has changed.

2015–2016 saw a 25 per cent cut in upstream cap­i­tal invest­ment two years in a row and it has remained low. Com­pa­nies have been focus­ing on short-cycle projects with aver­age lead times down at around three years. Mr Var­ro also points out we are already see­ing repur­pos­ing of plant; in Italy and France refiner­ies are now work­ing on biodiesel.

He says: “It’s not that some investors won’t make mis­takes, but over­all what we see is a remark­able change in the industry’s invest­ment strat­e­gy.” What we’re see­ing is recog­ni­tion that oil and gas will remain impor­tant ener­gy sources, but not nec­es­sar­i­ly in the way ana­lysts pre­dict.

No mat­ter what, pop­u­la­tion growth, com­bined with the demands of the emerg­ing glob­al mid­dle class­es, is expect­ed to keep con­sump­tion of oil and gas increas­ing for some time to come. Flex­i­ble dynam­ic think­ing and respon­sive­ness will be cru­cial to strate­gic suc­cess in the sec­tor.