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Andreas De Vries

Andreas De Vries

Andreas de Vries is a Strategy Consultant in the Oil & Gas industry, supporting companies to not only develop strategies for success but also execute them.

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Will The Third Great Energy Revolution End The Oil & Gas Industry?

Oilfield

The history of crude oil and natural gas is a history of technological innovation. Until recently the innovation supported crude oil and natural gas. Now, it challenges it, causing structural changes in the crude oil and natural gas markets.

Originally, crude oil was only used for lighting. This changed following the invention of the internal combustion engine, which outperformed steam engine in power, range and ease of operation and maintenance, and the invention of the conveyor belt, which made it possible to mass-produce the internal combustion engine at a price which was affordable to the masses. Not much later, crude oil became the transportation fuel of choice. The horse drawn carriage was replaced by the car; the locomotive by the diesel train; the steamship by the motor vessel; and the zeppelin by the airplane.

For a long time, natural gas was an unwanted by-product from crude oil production, and typically burned off (flared) at the production site. That was until, again, technological innovation made utilization of the benefits in natural gas possible. Improvements in pipeline technology made it possible to use natural gas as a feedstock for the chemicals industry, and as fuel for home heating, cooking and power generation. Later on, LNG technology improvements greatly expanded the market for natural gas and made it truly global.

Technological innovation was therefore not only behind the first great energy revolution—from wood to coal—during the Industrial Revolution of the 18th and 19th century, but also behind the second great energy revolution—from coal to crude oil and natural gas—during the first half of the 20th century.

American Energy Consumption by Source, 1775-2012

(Click to enlarge)

Source: Energy Information Agency, via Bloomberg

Now, in 2017, crude oil and natural gas, the great beneficiaries of earlier technological innovation, find themselves challenged because of continued technological innovation. Innovation in (battery) technology has made the electric drivetrain a serious competitor for the internal combustion engine, leaving crude oil challenged by electricity while at the same time that natural gas is being challenged by solar and wind in electricity generation.

Related: New U.S. Sanctions Threaten Russian Oil Projects

This has led some to predict the imminent demise of the oil and gas industry. But is this the correct conclusion?

We must remember that both crude oil and natural gas are not solely used for transportation (crude oil) and electricity generation (natural gas). And some of the drivers of crude oil demand, such as heavy duty hauling and aviation, will remain unaffected by the electrification of transportation trend. The same goes for natural gas, which will remain the main source of chemicals and energy for the heavy-duty industries such as steel, aluminum, cement and paper.

Even if the current expectations around technological innovation materialize, it will still take time before crude oil is comprehensively outperformed by electricity in transportation and natural gas by solar and wind in electricity generation.

Along with battery innovation, the electrification of transport also requires the development of recharging infrastructure. In areas where most houses have garages this is less of an issue, as their electric cars could be charged overnight at home. And since overnight charging means charging during off-peak hours, this wouldn’t be an immediate issue for most existing power grids. In areas with many homes without garages, however, a publically accessible charging network will need to be established. The most sensible solution for such areas is to equip public parking and office parking spaces with chargers (a fantastic business opportunity for utility companies!), but this requires collaboration between city planners, real estate developers and entrepreneurs, all of whom, barring a few exceptions, have only just begun thinking through the implications of electric transportation. Thus, it will most likely take years—possibly even decades—for many areas around the world to become truly supportive of the electric transportation trend.

The shift from coal- and gas-powered electricity generation to wind and solar faces similar practical hurdles in many parts of the world. In wealthier countries, funds will be available to finance a relatively fast transition, which will include early retirement of coal and gas plants. In countries where the grid is immature and investment is necessary, this investment can quite easily be directed toward solar and wind and away from coal and gas, leading such countries to skip the coal and gas age and move straight into the renewables era. Countries with existing coal- and/or gas-based electricity grids—whether poor or faced with competing priorities (growth or sustainability?)—will be more inclined to leverage the existing infrastructure as long as possible, however, ensuring continuation of at least part of current natural gas demand for electricity generation for a long time to come.

So even under the most optimistic forecasts for technological innovation, usage of—and thus, demand—for crude oil and natural gas will likely remain well into the future, but could soon reach a peak.

That doesn’t mean that the oil and gas industry will stay the same and has nothing to worry about. The mentioned technological trends will definitely create a completely different market dynamic. Managing profitability and growth in a flatlining or even shrinking market is completely different from managing them in a growing market, after all.

Related: Trump’s China Trip To Reap Billions In Energy Deals

Natural decline will demand continued investment in crude oil and natural gas resources to be able to continue to meet demand, under both kinds of market conditions. However, in a growing market natural decline is a much bigger challenge than in a flatlining or shrinking market, as in the former more than the natural decline will have to be added to production, while in the latter less will already suffice.

In a flatlining or shrinking market for crude oil and natural gas, oversupply will therefore be a continuous threat, making the kind of pressure on the price that the oil and gas industry has experienced over the last few years a permanent reality—think “lower forever” instead of “lower for longer”. In this environment, competitive advantage is in the lowest cost resources and operations. In the former, the NOCs have the edge over the IOCs; in the latter, however, most NOCs remain outperformed by their international counterparts.

Also, in a flatlining or shrinking market, growth can only be achieved through consolidation. Only the very best performing IOCs will be granted access to the resources of the not-so-well performing NOCs, while the IOCs with anything less than stellar performance will exit the market, as the low-price environment will push many NOCs to upgrade their own capabilities to ensure continued profitability.

This exit from the market by the IOCs with less than stellar performance will either be through bankruptcy or diversification into a new market with continued growth potential. Thus, there can be no doubt that diversification is now an urgent must for all IOCs to ensure long term growth and hedge against the risk of eventual obsolescence.

By Andreas de Vries for Oilprice.com

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Leave a comment
  • DewK. on November 02 2017 said:
    Yaw been saying this for 10 years. But guess what, technological advances in extraction and efficiency of drilling, production, and refinement not to mention mpg of vehicles, continually outpace technological advances in alternative energy. Plus, the infrastructure is already there and growing, business is booming. Sit on the sideline and put that in your pipe and smoke it while these oil bulls make dat $$$$$. You'll be old as dirt before oil goes away.
  • Bud on November 02 2017 said:
    You mean the era of Western Europe having its own significant source of liquid and gas hydrocarbons is coming to an end, don't you? How convenient, Russia can fill up your batteries with gas sourced electrons. Is it Andy or Yuri? Don't worry, as soon as the Saudis get their cash they will allow Libya to bail you out.
  • moron on November 02 2017 said:
    Uh, so from where does the energy supplied to battery storage come? Oil and gas.
  • Trevor on November 03 2017 said:
    Yes, I'm looking forward to charging my electric car, overnight with renewable energy. I could use solar to charge my powerwall and drain that into my car overnight, but that is getting a bit expensive. So it will have to be wind. And if the wind doesn't blow that night, I get to stay home the next day!
  • Abraham on November 03 2017 said:
    No it won't. Lithium ion batteries as beautiful and harmless as they may seem on paper, they're worse.
  • Paul D. on November 03 2017 said:
    The only energy revolution going now starts two miles underground and is headed to Asia and Europe for decades.
  • Bill Pettitt on November 03 2017 said:
    The author omitted THE MAJOR REASON for the use of oil as a luminant (and also as a lubricant).......Oil from the earth was replacing the whale oil we were extracting from those thousands of whales we were killing off.

    Edwin Drake was funded by Boston bankers to see if he could find a way to extract more oil from the earth than was seeping to the surface over in Western Pennsylvania. Boston was a whaling town at that time, so the bankers were seeking to invest in a plentiful replacement.

    They found it.....and then some.
  • andy makranoff on November 03 2017 said:
    I cant wait till Uber comes to my house with there electric cars, to pick me my wife and five little children up way out in the country. They can clean up the puke and the Mcdonald's mess in there car. Hope they have enough room for the hockey bags and the groceries I pick up as well. When my kid's have to go to the hospital for the flu and bleeding, It will be nice to have that mess cleaned up as well. When my son's turn 16 they can call Uber up to take there girlfriends out on dates. That will empress these girls with a foreigner chaperone to boot. Hope they have a cool stereo system and car. When my sons make there millions later, they can have the same car as everyone else. Even the people on welfare. This sounds like it's all going to happen within a couple of years, with this electric energy and there cars practically being free. Definitely cant afford to go to back to those expensive gas guzzling chevrolet suv's. Hope Uber has the tractors at this time to plant the crops for free, so we can get free groceries as well. This will happen, because It is good for the planet.
  • Stephen Verchinski on November 03 2017 said:
    The comment regarding cheaper...if we stripped the fossil fuel subsidies out the public would be screaming for high speed rail and would junk the vehicles entirely in urban areas just like in Europe. That said, good luck to all of us in burning down this spaceship. You just uncovered a crucial element that said you have to go slower to get the 2 billion year ride but no, just ignore the flashing red lights and lie to the public. Yup thats progress. Its like going downhill chasing after a ball of gold not noticing that behind you is a boulder accellerating to run you over.
  • Realismatwork on November 04 2017 said:
    This entire column can be reduced to one sentence
    “ until battery technology takes a amazing leap oil and gas is the only viable energy source “.
    Secondly an EV is not powered by electricity it is powered by coal or gas or nuclear .
  • Marcus Rönningås on November 06 2017 said:
    @Realismatwork "Secondly an EV is not powered by electricity it is powered by coal or gas or nuclear"
    We purchase COO's (Certificates Of Origin) for wind, so it is possible to ensure the the equal amount of electricity you consume is produced by a certain type of energy source. SO basically we run our Ioniq on windenergy.
  • Bill Simpson on November 06 2017 said:
    Oil and gas will be important and valued until they are gone. Barring some major fusion breakthrough, living standards will fall significantly after we reach peak oil production, probably within 20 years from today.
  • RAJEEV YADAV on November 08 2017 said:
    Oil & Gas not only required as fuel but also for petrochemicals, plastics, textiles etc etc.. you name it and can see the trail.
  • LeonarDoc on November 08 2017 said:
    Rather captivating reading, it is. The energy revo is our future but rather a distant one I'm sure. It's going to be over 20 years surely. I suspect when natural gas and oil are gone our scientists will invent their artificial substitutes via some chemical tools and chemistry is now based on hydrocarbons. LOL
    The demand for natural gas and oil is going to be on the rise for long and the prices too. Solar, wind energy or electrical cars are OK in some unique countries or places.
  • Roger on November 08 2017 said:
    Nuclear Power is the only solution which can complement Oil & Gas in a reliable way. France gets 70 % of their electricity from Nuclear. Japan shut down most of their nuclear plants after Fukushima but slowly and surely, they are starting up the nuclear plants again. One teaspoon of nuclear fuel has equivalent energy to 1 ton of coal/3 barrels of oil
  • Jakub Bednarek on November 10 2017 said:
    Oil is treated by many as a fuel. If that was the case then electrical energy is really a serious threat. However what is omitted by many is that Oil is needed to produce polymers, fertilizers and I don't foresee we stop using those.
  • snoopyloopy on November 30 2017 said:
    @Realismatwork

    "Secondly an EV is not powered by electricity it is powered by coal or gas or nuclear ."

    Or wind or solar or hydro.

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