The global energy landscape is expected to change – led by renewables, undermining the role of coal and natural gas in power generation. While structural changes in auto-industry will have devastating effect on the global oil demand during the next few decades! How will it all affect the destiny of oil and gas industry?
I can recall, it was the month of September in the year 2012, when I last filled up gasoline in my car with a price tag of $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 monthly budget for 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 coma and found myself in the 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 and I started to recall past. 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 gasoline was now selling at $1.76/gallon. I was shocked to hear this as gasoline used to be close to four dollars a gallon as I recalled.
Asked my wife what had happen during this period? In her layman understanding she said that she has been hearing about something related to US shale oil boom that caused oil prices to collapse. Being in the oil and gas profession I know 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, where I had predicted such thing to happen, and my forecast in 2014, 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 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. What causes collapse of oil prices and what is the future prospects of oil and gas industry were some of the questions on my agenda for research. Firstly, what happened in the past and secondly what are likely to happen in the future? Three things are simultaneously happening in the process. Firstly, additional barrels of unconventional oil that were there but unexploitable in the past due to low permeability and technological constraints (including reserves in new frontiers/deep water, and shale gas condensate) are now exploitable. In the process US shale oil production increased from 1.2 MMBD in January 2007 to 5.6 MMBD in April 2015. Lately, it declined to 5.06 MMBD in March of 2016.
What causes shale oil to 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% 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. In this learning curve, the total number of rig count peaked in October 2014 at 1257 and thereafter we saw a gradual drop and by March 2016, down to 307. Continuous decline in break-even costs and in some of the basins breakeven cost down below $30/bbl that kept a number of companies continue producing despite a weaker oil price environment.
Structural shift in automotive industry
Secondly, over 72% of oil is predominately consumed in transportation sector (road, air, rail, sea, etc). Over 80% 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 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 (mmbd) and under high cases the displacement of 38.9 mmbd in 2040.
Electricity demand and renewable revolution
Thirdly, 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%. In 2012, coal accounted for 40.2%, natural gas 22.4%, hydro 16.5%, nuclear 10.8%, solar & wind 2.7% and others 7% in 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.
If the role of fossil fuels will be diminished in power generation then the question is, from where this replacement and additional electricity capacity would be produced to meet the ever growing electricity demand? Surely, it has to be produced from renewables to protect global warming and save the humanity and the plant Earth.
Technology – phenomenal renewable growth and dwindling cost
In 1995, there were only few countries in global wind energy group 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 (for example US Wind Energy Selling At Record Low Price of 2.5 Cents per kWh). 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’.
The solar capacity increase to 230 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.
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 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% to say 45% in 2040 (oil and gas down from 57% to 30%), it will be big question for 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 & gas industry – Waking up in 2040
For the sake of discussions a senior oil and gas executive who had just formulated company’s new strategy, which is based on EIA-IEO-2016 wherein global oil demand is to increase from 90 million barrels daily (mmbd) in 2012 to 120.9 mmbd in 2040 and natural gas demand increases from 328 billion cubic feet daily (bcfd) in 2012 to 557 bcfd in 2040. What happens if he falls into a deep sleep and wakes up in 2040?
Based on current and expected penetration of EVs, FCVs, NGVs and renewables, it would not be surprising to see that world would have completely changed in 2040? Major chunk of ICs’ fleet would have been replaced by EVs, FCV, NGVs and autonomous vehicles while households would have become 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, lighting, cooking and charging EVs batteries etc. While wind farm 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 ones 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 has been substantially reduced (say from current 57% to 30%)? In the light of current and expected changes in the global energy landscape, oil and gas companies need to correctly assess the reality of electric vehicles and renewables and change their strategies accordingly to avoid complete disintegration.
石油圈
