I can recall, it was the month of September in the year 2012, when I last filled up my car with gasoline for $3.81/gallon ($57.15 for 15 gallons) in Dallas, Texas. The higher gasoline prices during the past 3-4 years had put severe financial stress on the monthly budget of an average American household.
Unfortunately, due to a car accident I ended up with multiple injuries and went into a deep coma.
On June 16, 2014, suddenly, I woke up from my coma and found myself in a hospital bed. After a week of being under observation, the hospital discharged me. While we were driving home, my wife stopped at the gas station. When she filled up the tank, I asked her how much she paid for the gas and she told me a total of $26.49. She further added that the gasoline was now selling at $1.76/gallon. I was shocked.
I asked my wife what had happen during this period. In her layman understanding she said that the U.S. shale oil boom had caused oil prices to collapse. Being in the oil and gas profession I knew about shale oil and I recalled that in 2012 I wrote an article entitled: “The US unconventional oil revolution: are we at the beginning of a new era for US oil?”, published in European Energy Review on June 18, 2012. Two years later, my forecast turned out to be true.
As I slowly recovered from coma, I returned back to my normal life and started carrying out my everyday research and forecasting. During the period when I was in a coma, things had changed quite a bit. Oil prices came down from over $100/bbl to below $30/bbl and lately revived close to $50/bbl. Two questions arose from this experience: First, what caused the collapse of oil prices and, second, what are the future prospects of the oil and gas industry?
Three things are simultaneously happening in the process. First, additional barrels of unconventional oil that were unexploitable in the past due to low permeability and technological constraints (including reserves in new frontiers/deep water, and shale gas condensate) are now available. In the process U.S. shale oil production increased from 1.2 million barrels per day (mb/d) in January 2007 to 5.6 mb/d in April 2015. Lately, it declined to 5.06 mb/d in March of 2016.
What caused the shale oil boom?
Persistent higher oil prices allowed the unconventional shale oil industry to grow and nurture and even counter the regime of declining oil prices. This was possible due to technological advancement (horizontal drilling, multi-fracturing, improved drilling efficiency and completion, supporting higher productivity per well, including well configuration and concentrating towards the most productive areas of the Basin).
In the process, Estimated Ultimate Recovery (EURs) in some of the basins also improved and reached 50-60 percent during the years 2015-2016. Consequently, oil productivity per rig in all seven basins recorded phenomenal improvements. For example, oil productivity per rig for Eagle Ford was 42 b/d in January 2007 which increased to 829 b/d by March 2016 – about 20-fold increase. Related: Oil Prices Could Spike As Analysts See Venezuela Losing 500,000 bpd
In this learning curve, the oil rig count peaked in October 2014 at 1257 and thereafter we saw a gradual drop and by March 2016, it fell to 307. Continuous declines in break-even costs – in some of the basins breakeven costs fell below $30/bbl – kept a number of companies producing despite a weaker oil price environment.
Structural shift in automotive industry
Secondly, over 72 percent of oil is predominately consumed in transportation sector (road, air, rail, sea, etc). Over 80 percent has been associated with road transport. Therefore, any revolution in auto-industry can disrupt the future global oil demand, thereby affecting the oil company’s growth.
During the last decade or so structural changes have been taking place in the transport sector. Over a century internal combustion vehicles (ICs) are in the process of being replaced by penetration of electric vehicles (EV), fuel cells vehicles (FCV), and natural gas vehicles (NGV). In addition, fuel efficiency, semi and fully autonomous vehicles will surely reduce global oil demand.
The quantitative assessment carried out by Andreas and this author looks at how much oil is expected to be displaced with the penetration of electric vehicles (EV) under alternative scenarios. The authors concluded that under reference case penetration of 424 million EVs in 2040 is likely to displace 13.1 million barrels daily (mb/d) and under high cases the displacement of 38.9 mb/d in 2040.
Electricity demand and renewable revolution
Third, for global economic prosperity the demand for electricity will continue to increase as there is a strong positive correlation between electricity consumption and economic growth. However, it is important to know how it will be produced. Historically, coal has been the dominant source of electricity generation and in some countries its share was well over 60 percent. In 2012, coal accounted for 40.2 percent, natural gas 22.4 percent, hydro 16.5 percent, nuclear 10.8 percent, solar and wind 2.7 percent and others 7 percent of power generation.
However, according to Bloomberg New Energy Finance (BNEF) study the way we get electricity is about to change dramatically, as the era of ever-expanding demand for fossil fuels comes to an end—in less than a decade.
Technology – phenomenal renewable growth and dwindling cost
In 1995, there were only a few countries in global wind energy industry and by 2015 this group expanded to 105 countries. At the end of 2015 cumulative global wind power generation capacity increased to 432.42 gigawatts (GW), up from 4.8 GW in 1995 (Figure-1). The substantial growth in renewable is associated with improvement in technology and falling cost.
The cost of wind and solar power are falling too quickly and even current rock bottom coal and natural gas prices have failed to arrest the momentum of wind and solar energy growth. In 2015 the global wind energy capacity increased by 63 GW as compared to 2014, which corresponds to about 60 nuclear reactors. This allowed wind power to surpass the dominance of nuclear energy 382.55 GW capacity in January 2016 (the London-based World Nuclear Association). Based on GWEC projections “wind power installations will nearly double in the next five years, led by China”.
Figure-1: Historical trend of global cumulative wind power capacity
The solar capacity increase to 200 GW in 2015 and within the next 4 years, BSW-Solar expects that the total global solar PV capacity will more than double, reaching to at least 400 GW. According to BNEF wind and solar will be the cheapest forms of producing electricity in most of the world by the 2030s.
Source: Solar Energy Industries Association Related: Devastating News For OPEC As Oil Revenues Hit A 10-Year Low
No matter what the magnitude of penetration of EVs, FCVs and autonomous vehicles, it will no doubt substantially reduce the global oil demand in road transportation in the coming decades, while significant increase in renewables in the total energy mix will have a devastating effect on the role of coal and natural gas in power generation. For example, if the share of fossil fuel shrink from current 86 percent to, say, 45 percent in 2040 (oil and gas down from 57 percent to 30 percent), it will raise large questions about the survival of oil and gas companies. The expected level of investment during now and 2040, in renewable $7.8 trillion (including $3.4 trillion for solar, $3.1 trillion for wind, and $911 billion for hydro power) – while only $2.1 trillion is associated with fossil fuels – is clearly demonstrating diminishing role of oil and gas companies. How much? Only time will tell.
The future of oil and gas industry - Waking up in 2040
For the sake of discussion if a senior executive of Oil and Gas Company falls into a deep sleep and wakes up in 2040, it would not be surprising to see that world would be completely changed. Major chunk of ICs fleet will be replaced by EVs, FCV and autonomous vehicles. Households would also be self- sufficient in generating their own energy needs. That is, most of the urban houses are covered with small units of solar panels to generate the required energy to meet electricity demand for their heating/cooling, cooking and charging EVs batteries etc.
Wind farms would be common in rural, remote mountains, offshore and isolated areas to generate enough electricity to meet the demand of the community. No hassle, as everything would be under one’s roof top or associated with community wind farms.
In such a scenario, what would be the reaction of this senior executive especially when the role of oil and gas is has been substantially reduced (say from current 57 percent to 30 percent)? In the light of current change in the global energy landscape, oil and gas companies need to correctly assess the reality and change their strategies accordingly to avoid complete disintegration.
By Salman Ghouri for Oilprice.com
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