For years, the oil and gas industry has boasted about the longevity and durability of oil and gas reserves despite growing signs that peak oil demand is around the corner. Many companies shrugged off the threat. Suddenly, however, there appears to be a scramble underway by energy companies to begin preparing for the peak and to transition to cleaner forms of energy.
The tone at the IHS CERAWeek Conference in Houston was glaringly different than in years past, with one oil executive after another talking up the need to address climate change and prepare for a low-carbon world. To some degree, this is lip service. Very few, if any, companies are making proactive decisions to leave their reserves in the ground and unburned.
But we seem to be in the midst of a major change in the industry, and one that is not just about a shift in rhetoric. Norway's $1 trillion sovereign wealth fund recently recommended divesting from upstream oil and gas companies, a move that sent shockwaves through the industry.
Other signs of change abound. Many oil companies are suddenly backing methane regulations. Shareholders are pressuring companies to acknowledge their long-term risks to climate change. Royal Dutch Shell is aiming to reduce carbon emissions by 2 to 3 percent between 2016 and 2021, the first specific target laid out by the company. Importantly, executive pay will be linked to those goals.
Occidental Petroleum plans on doubling its Permian production to 600,000 bpd within the next five years. But the company's chief executive also said that she wants Occidental to become carbon neutral. "We believe if you're not addressing these [climate] issues today, you're going to be behind the game," Vicki Hollub, Occidental's CEO, told the FT. "We feel like that's the key to sustainability of our business over time," she said. "If you don't have that, you almost don't need to be in operation." Occidental wants to capture its CO2 and reinject it underground into reservoirs, which, not coincidentally, could lead to more oil production.
Moreover, even as the oil majors continue to scale up their shale operations, they are increasingly turning to renewable energy to power those same operations. BP is only the latest company to turn to solar because it is the cheapest option. "It's a no brainer for them to play in solar," Katherine Ryzhaya, the CEO of Lightsource BP, a solar company partially owned by the oil company, told Bloomberg. "They're doing it for financial reasons." Last year, Exxon singed a deal for 500 megawatts of solar and wind to power its Permian operations.
Separately, the world's largest oil trader, Vitol, said that it expects oil demand to reach a peak within 15 years. That is not at the most aggressive end of the peak demand forecasts, but it is notable because of who is saying it. Vitol's business is moving oil around - 7.4 million barrels per day in 2018 - so a peak is an existential problem. The FT says that Vitol's admission about peak demand is the "most detailed yet from a trading company whose views are closely tracked in the industry."
"We anticipate that oil demand will continue to grow for the next 15 years, even with a marked increase in the sales of electric vehicles," said Russell Hardy, Vitol's CEO, according to the FT. "But that demand growth will begin to be impacted thereafter." Vitol is looking at cleaner fuels, energy storage, and wind power. That's worth repeating - the world's largest oil trader is beginning to explore a pivot into clean energy. It's only marginal, and not consistent with the climate targets set out by the scientific consensus, but it reveals that the oil industry itself is beginning to see the writing on the wall.
Behind much of this shift is the clear recognition that the oil and gas industry has some complicated financials. The oil majors are posting profits, but a lot of their earnings come from petrochemicals, refining, LNG and conventional oil fields. They are going big in U.S. shale, but those operations are by and large not posting positive cash flow yet.
Smaller shale companies are mostly unprofitable and running out of time. They are scaling back drilling as the oil majors push them out of the Permian. A review of 29 publicly-traded oil and gas companies in the U.S. found $6.7 billion in negative free cash flow in 2018, according to the Institute for Energy Economics and Financial Analysis and the Sightline Institute. That came despite the fact that U.S. oil production hit a record high last year. "[T]hese results hid a grim irony: record-setting production didn't lead to financial success. To the contrary, America's frackers spilled alarming volumes of red ink in 2018," the report's authors wrote.
Shale drillers continue to believe that profits are around the corner as they improve technology and lower costs. Perhaps. But the industry faces a bigger and longer-term problem as peak oil demand looms. Some companies are beginning to prepare for that. Others are not.
By Nick Cunningham of Oilprice.com
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Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. More
Comments
The Fund’s decision is a huge misjudgement based on faulty assumptions, namely law return on oil and gas stocks and a dubious claim of a looming peak oil demand. It might have been receiving biased environmental advice rather than sound financial advice.
The argument about declining return on oil and gas stocks is not only erroneous but it can’t be substantiated under any scenarios. Norway’s sovereign wealth fund has only to look at the huge profits the oil majors like Shell, ExxonMobil and Statoil are making to realize the absurdity of such a claim.
If Norway’s sovereign fund was advised by oil experts like me rather than being influenced by the environmental lobby, it would have realized that there will never be a post-oil era or a peak oil demand throughout the 21st century and far beyond.
Of recent times, many projections have been made about peak oil demand the latest of which comes from Vitol, the world’s largest oil trader, which is projecting that oil demand to reach a peak within 15 years.
There could never be a post-oil era because it is very doubtful that an alternative as versatile and practicable as oil, particularly in transport, could totally replace oil in the next 100 years and beyond. Oil will continue to be used extensively in the global petrochemical industry and other industries and outlets from pharmaceuticals to plastics, aviation and computers to agriculture which can’t continue to feed 8 billion people without oil and also in transport in most of the developing countries. Oil will continue to reign supreme throughout the 21st century and far beyond.
There will never be a peak oil demand either. Global oil demand will never peak throughout the 21st century and far beyond because electric vehicles (EVs) will never be able to replace oil in global transport. They will only decelerate the growth of global demand for oil. Even the introduction of 350 million EVs by 2040 which is an impossibility will only displace 9% of the oil used in global transport or 11 million barrels of oil a day (mbd) out of 120 mbd used by then.
It is a valid economic principle that oil producers and investors should always aim to maximize the return on their assets and investments. If there will be neither a post-oil era nor a peak oil demand, it follows that investors will look for opportunities in the most profitable outlets in the world. The global oil industry is and will continue to be the most profitable industry for the foreseeable future.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
Industrial civilization of all the developed countries is completely dependent on a vast amount of energy per person. Decrease the energy available for any reason, and the entire system will soon collapse due the tremendous level of debt throughout the financial system. If you doubt that will happen, study what happened in 2008, after people could no longer pay their mortgages. Watch the documentaries about it on YouTube. That was nothing compared to the bankruptcies that would occur with a global transportation shortage from not being able to get enough oil to move goods and people. And one airliner can burn more fuel that hundreds of cars. Air travel is projected to double in the next 15 years.
As far as climate change, that battle was lost 50 years ago. Plan for rising seas and hotter summers. The risk from climate change is trivial compared to the risk from a financial meltdown. A banking system collapse could kill billions of people because little commerce can functions if the banks are all closed. Like former Treasury Secretary, Hank Paulson, said after the 2008 financial crisis, 'Nobody knew how to put a collapsed banking system back together and get it working again. We didn't know if it could ever be done, or where to start.'