I often get asked by readers of my articles, most of which involve investing in upstream oil and gas producers, and the service providers that support their activities, what the future of liquid, petroleum based fuels might be. People asking these questions, are rightly concerned about the viability of these companies. Concerned because much of what they hear from the news media, governmental entities, and, sometimes, from the companies themselves indicates there is a curtain dropping on petroleum assets in the next few years. All thanks to an “Energy Transition,” narrative about which they hear on an endless loop from morning to night. To which I reply, “Poppycock.”
If it were true there was an actual Energy Transition taking place, there would be no point in investing in oil and gas, as there would be a point at which a demand signal would be sent by the market that these fuels were no longer needed. There is no such signal being sent, in fact it’s quite the reverse. The market has instead been telling us that, despite minor fluctuations driven by external economic conditions, there is steady, resilient, and increasing demand for oil and gas.
In this article we will look at several examples that support this contention.
The not-so Energy Transition
Let me state unequivocally, THERE IS NO ENERGY TRANSITION! Period, full-stop, end of story. There will be no cut off of oil and gas in 2030, 2040, or 2050. There is of course energy "addition," in the form of wind, solar, biofuels, and Hydrogen. These “intermittent” sources will share a modest part of the global energy load along with “on-demand,” petroleum sources as long as there is a need for individual transportation and travel, we retain an industrial economy, and eight-billion people show up for breakfast daily.
Chris Wright, CEO of Liberty Energy and frequent commentator on Climate Change topics and the Energy Poverty that may result from a head-long rush to abandon petroleum-based fuels, was quoted in an interview with a Denver political forum, The Podium, as saying-
“Investments in combating climate change can be done constructively, but all too often we overlook the consequences of driving up energy costs and driving down energy reliability. These costs are borne disproportionately by lower income folks, who require modern energy to access clean-cooking fuels, easy access to drinking water, sanitation, education, etc.”
Below is an Energy Information-EIA, graphic, a data source to which we regularly turn in seeking supporting data for various topics. It is forecasting liquid fuels consumption through 2050. The scale might as well be 2100, it won't matter. Here’s my bet. Your grandchildren will be pulling up to a gas pump somewhere in the distant future to fill the family jalopy, the same as you do now. I am that confident in my conviction that the world will require this basic energy source far longer than most people, and certainly most governmental bodies anticipate, or will admit.
This graphic is instructive. It tells you that the scientists and statisticians at the Energy Information Agency-EIA, have concluded, that oil and gas have a bright future as far as the eye can see. In no scenario, this agency projects do we ever use less oil than we are using now, and in most cases, quite a bit more will be needed, as you can see in the EIA “High Economic Growth” curve (Dark, brown line at top).
When I am making a wide-ranging point, I like to have corroboration from another independent source. In this case, I turn to OPEC’s monthly report, on the assumption they know a thing or two about the future of fuels. Below is their estimate for petroleum-based fuels through 2045. It seems even more conservative than the EIA estimate above, as only about 15% growth is anticipated.
The point is, both agencies, one of which is admittedly, “talking their book,” have put their stamp on demand estimates that clearly show oil and gas will play a major role and increasing role in energy supply in the coming decades.
Returning to the EIA, and converting energy to quadrillions of British Thermal Units-BTU’s, we see that oil and gas are projected to provide ~75 of the 118 quadrillion BTU’s of energy supplied annually to meet global needs. About 63% of global energy requirements will be met by petroleum sources, a figure which includes about a ~2% shift to biofuels.
The EIA graphic shows that the big loser will be coal, and it from that source that non-hydro renewables will claim their roughly 18% market share by 2050.
Overall it shows that oil and gas will decline from about a 68% of global energy supply, to 63% as mentioned above, or 61% if you back out the 2% that is contributed by biofuels.
Contrary to what you hear from the Mainstream Media, companies are increasing their investments in oil and gas. Below is a graphic put together by Jeff Krimmel, Chief Strategy Officer for Pinnacle Reliability, an Energy Data consulting organization. It shows very clearly that the top 15 independent oil and gas producers are increasing their capex budgets in 2023. Unsurprisingly, they all plan to produce more oil and gas in the coming year.
These companies are not alone. The Super Majors, ExxonMobil, (NYSE:XOM), Chevron, (NYSE:CVX), Shell, (NYSE:SHEL), and even BP (NYSE:BP), (Which in 2022 forecast a 40% decrease in oil and gas production by 2030, has backed-off that goal, instead reducing these sources by 25% by 2030.) have all increased their upstream capex budgets by billions in 2023. They would not do that if there was fear their production would become superfluous.
Most notable among them is XOM, reportedly considering a merger with Pioneer Natural Resources, (NYSE: PXD). A capital investment that will run into the 10’s of billions if they proceed, and create a Permian behemoth producing ~1.3 mm BOEPD.
PXD generated $11 bn in EBITDA in 2022, and is currently the Permian's largest producer at ~650K BOEPD. Their trading multiples are ~5X and $81.00 per barrel.
These multiples probably do not reflect the true value of the 2.2 bn of 2P-Proved and Probable, reserves upon which PXD sits, and XOM covets. What an offer by XOM for PXD would show beyond a doubt, is that crude reserves are currently undervalued in relation to the role they will play in providing energy in the coming decades.
Note: I will have a separate OilPrice article discussing the Pros and Cons of a possible tie-up between these two oil giants.
By David Messler for Oilprice.com
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