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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Oil Industry To Waste Trillions As Peak Demand Looms

Fracking

ExxonMobil and its peers risk blowing $2.3 trillion on oil projects that will not be needed if the world hits peak demand in the next decade.

A new report from The Carbon Tracker Initiative analyzed what would happen if the oil market saw demand peak by 2025, a scenario that would be compatible with limiting global warming to just 2 degrees Celsius. The headline conclusion is that about one-third of the global oil industry’s potential spending – or about $2.3 trillion – would not be needed. In other words, the oil industry is on track to waste a massive pile of money if demand peaks in less than ten years.

Of course, the vulnerability to peak demand varies by company. Carbon Tracker surveyed 69 global oil and gas companies, and their exposures range from 10 to 60 percent of their potential spending. That is, 10 to 60 percent of their spending could be unnecessary or wasteful if demand peaks by the middle of the next decade. The latest report adds more detail to the “stranded assets” theory – the notion that large volumes of oil will be left in the ground because demand peaks, whether because of alternatives or climate regulation, or both.

Some medium-sized companies like Southwestern Energy and Apache Corp. topped the list with 60 to 70 percent of their potential upstream capex vulnerable in a peak demand scenario. As for the oil majors, ExxonMobil would be the most vulnerable to peak demand, with about half of its potential spending through 2025 unneeded. Other oil majors fare a bit better, although not by much. Chevron, Eni and Shell could see 30 to 40 percent of their capex spent on wasted projects.

Which projects are subject to redundancy largely comes down to economics. U.S. shale drilling has seen dramatic costs declines, pushing some higher-cost projects out of the range of viability in this scenario.

Intriguingly, Carbon Tracker concludes that there should not be any spending growth from 2016 levels. The global oil industry savagely cut spending between 2014 and 2016, a response to the plunge in oil prices. A large number of projects were scrapped, exploration and drilling dried up, and very few new greenfield projects moved forward. With spending still roughly stuck at a fraction of the pre-2014 level, Carbon Tracker says that it needs to be frozen today’s levels and not rise as many companies have planned. Related: Saudi Reshuffle Could Completely Shake Up Oil Markets

Importantly, however, Carbon Tracker says that about two-thirds of the potential oil and gas production that could find itself unneeded in a peak demand scenario is controlled by the private sector. In other words, state-owned national oil companies from the likes of OPEC are much more likely to hold onto market share, while expensive projects under the control of the oil majors would run into trouble.

This matters because some large-scale projects, such as oil sands and deepwater, can produce for decades. If demand peaks, some of them might not be needed for the full potential lifespan that companies have planned.

The upshot is that that publicly-listed oil and gas companies need to be more transparent about their long-term strategies, which Carbon Tracker says makes “it difficult for investors to understand and test the degree of alignment with a 2D scenario. Companies may have already decided to put a number of high cost projects on hold, but more can be done to tell this story to their shareholders.”

Peak demand is a possibility that until recently, few had considered likely. But it isn’t just environmentalists – even some oil companies see threats looming on the horizon, although they differ widely on timeframes. Executives from Royal Dutch Shell have voiced some agreement with the Carbon Tracker scenario, predicting demand will peak in the next decade. BP, on the other hand, sees demand rising through 2040. Related: The Biggest Obstacles For China’s $900 Billion Silk Road

But, for now, there are only small signs that the oil majors are preparing for this eventuality. They have fought against shareholder resolutions calling for more disclosure of their vulnerabilities to climate change regulation, although there have been a few high-profile defeats recently.

At the same time, the oil majors are hedging their bets. There has been a huge exodus by the oil majors from the Canadian oil sands this year, as they divert money into shorter-term shale projects. They are also pouring money increasingly into natural gas, and in a few minor cases, renewable energy.

However, by and large, they are still planning to produce oil for decades to come. That may work out for them. But if oil demand hits a peak in the 2020s, they will waste hundreds of billions of dollars on projects that are no longer needed.

By Nick Cunningham of Oilprice.com

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  • NickSJ on June 25 2017 said:
    It's only been a few years since the scaremongers were prophesying the end of the world due to "peak oil" supply. Now that that prediction has been rendered ridiculous by the present supply glut, the doomsayers have a new scary prediction to rattle on about - peak demand. Apparently this sort of thing keeps writers employed when they can't think of anything useful to write about.
  • Josh Gregner on June 26 2017 said:
    If one were to take this report serious, the only logical conclusion for major oil companies is to start divesting in projects with long time requirements for a break-even ROI.

    For the coming two decades smart oil players would move to consolidate / merge / cut costs and orderly wind-down to a much diminished oil industry (there will always be some form of oil industry, it will just not be a huge as it is now).

    However, this is not how people in the industry seem think: a lot of people consider the problems of the oil market as a temporary thing only. So I'm afraid this report will be ignored as another "liberal greeny attack on big oil". We have seen what even moderate softening of demand does to companies in the coal sector. Oil and gas investors - beware!
  • spin on June 26 2017 said:
    2025 is possible if China is able to make as per its pledge, 12% of new vehicle sales EVs by 2020 which would be 3.4 million vehicles out of a total global increase in 2016 of all vehicles of 4.2 million vehicles or 4.5%. If not at 700 thousand EV sales in 2016 with year on year increase of 30-40% it will take longer.
  • Dan on June 26 2017 said:
    What we called moonbeams, now snowflakes, have been saying it's the end of oil and gas for 60 years. Same family tree, still wrong.
  • Joe on June 26 2017 said:
    Sorry, but this article is a Nothing Burger. Peak Demand won't happen for another 50 years. Mark it in your calendar: 2067.
  • John Hunter on June 26 2017 said:
    Many people forget that a fair chunk of the use of oil and gas is for plastics, clothing, and so on and I don't see myself using an electric car as a shirt, computer case, or toilet seat. I agree with NickSJ - these loons are always looking for some scary claim. On the one hand they call for the end of oil and gas; if that happens watch them scream when they can't fly to their environmental conferences and drive SUVs long distances.
  • Harquebus on June 26 2017 said:
    It is a mistake to value oil in currency which, can be created ex nihilo while crude oil can not.
  • Brent Jatko on June 29 2017 said:
    No need for inflammatory comments like "moonbeams" or "snowflakes."

    If anyone deserves that appellation it is conservatives as they are the ones being easily provoked or "triggered" right now.
  • Jason on June 29 2017 said:
    We'll have 1.5 billion more people on the planet by 2035 and world GDP will be double what it is today. With oil production declines of 3% - 5% per year from existing sources, the world will need many new sources of crude oil, even with the addition of EVs.

    https://oilprice.com/Energy/Energy-General/Electric-Cars-To-Reshape-Copper-And-Oil-Demand.html

    The idea that oil companies will have stranded assets is not sound. Especially needed will be the long-lived tar sands of Canada.
  • Steve on June 30 2017 said:
    @ Brent: Conservatives have been called the most vile things in this now completely uncivil discourse of public debate.

    The frustrating thing is demands are being made on our freedoms for political and socialistic reasons instead logic, common sense and actual science.
  • Bill Simpson on July 15 2017 said:
    Peak oil demand won't hit for another 15 years, or longer, from today. I wouldn't be surprised if it took another 25, or 30 years, although I won't live to see it, if it does take that long.
    One thing I can tell you for sure. You don't want to see peak oil supply arrive before peak demand arrives. I promise you, that if 'peak oil' hits first, it will unleash a financial meltdown that will make the Great Depression and Dust Bowl seem like the good old days.
    Banks won't survive the continuous economic contraction that peak oil supply will unleash, should it arrive first, which it probably will.
    The entire financial system will collapse, as it almost did in 2008. People unfamiliar with what nearly happened in 2008 should go on YouTube, and watch some of the documentaries made about that crisis. It was a lot more dangerous than most people realize. Peak oil will dwarf that threat. Try not using anything made from oil. We are living in the Petroleum Age. Too bad it is a finite resource being rapidly depleted.

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