Treat oil and gas future forecasts carefully and be change-ready

Nov 14, 2019
4 min read
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The oil and gas journey still has a long road ahead despite rising renewables but the route to demand predictability could be littered with bumps.

And that will present the industry with a conundrum as it determines effective levels of investment to accurately match actual demand while meeting environmental commitments.

These were among the observations in a Global Business Leaders panel discussion entitled: “The future of energy and the role of oil and gas.”

Ed Rawle, ADNOC Chief Economist explored how “less optimistic” predictions could look and their possible impact on oil company strategy formulation.

He highlighted an expected global oil demand peak projected sometime between 2030-40.

“The contraction after the peak is relatively limited which means ultimately there is a lot of oil demand - 110 mb/d by 2050 is an enormous amount of oil, which begs the question: where is it going to come from?”

Another projection differed by 66mb/d between its highest and lowest 2050 prediction.

Rawle said the industry had got it wrong previously; underestimating the scale of demand from China – “OPEC was off in its forecast by 25/30 per cent, roughly the GDP of Africa today” - and the epic rise of U.S. shale.

“Could we, as analysts, miss the fall of shale in the same way we missed the rise,”

said Rawle, going on to indentify key risks to oil demand centred around road transport, such as unpredictable electric car and battery technology advancement, autonomous cars and economic swings affecting standard car production.

He also highlighted changes in demographics, working age population declines and millennial spending habits.

“Consumer behaviour could change through time, especially as the baby boom generation retires and the mantle is picked by the millennial generation.

“We’ve already seen a big change in the way that generation consumes, could this have a big implication for the way they consume road transport? And that’s linked to climate change and fuel efficiency targets, how policy will respond to the growing need to be more sustainable.”

Tom Ellacott, Senior Vice President of Wood MacKensie, said many firms were already adapting in anticipation, broadening investment into renewables and the whole value chain, and leveraging synergies in their portfolios.

“It (forecasting) creates a real conundrum, how you respond strategically. Overall we’ve seen companies trying to imbed more resilience in their portfolio and being extremely disciplined in their allocation of capital.

“Companies are thinking of new ways of working…trying to unlock as much value from assets already in production. There are lots of big challenges, in terms of how we’re going to develop enough supply to meet oil demand projections if we are going to see continual, albeit it slowing, growth into the 2030s.”

Wim Thomas, Shell’s Chief Energy Advisor, said his company had been using “scenarios for almost 50 years to deal with the enormous range of uncertainty”, including its Sky scenario that meets the goals of the Paris Climate Agreement, predicts peak demand in 2025 and suggests oil and gas needs won’t shrink much with “assumed” economic and population growth.

Biogas and hydrogen could feature larger in the future fuel mix, but good timing of investment was required.

“All these things take time to develop. We live in a world where the assets are built and investments and positions already taken for the next five years. So there’s momentum in our energy investments that continues the system as it looks today.

“What does the future look like for oil and gas? We will continue seeing growth, but at some stage it has to come down.”

Thomas added that aviation and shipping would demand fossil fuels for a long time yet.

“The energy transition is going to happen…but it takes a couple of decades adjust.”
Tomonobu Uchida, President of JOGMEC, spoke of greater hydrogen presence in the energy mix, and brought petrochemicals into the debate, saying: “There are certain aspects of hydrocarbons that cannot be replaced by other energy sources…the most difficult area in terms of replacement is petrochemicals.”

Moderator Dr Carole Nakhle, Founder and CEO of Crystol Energy, summed up the discussion, saying energy transition was not about substitution but complimenting and “any forecast should be treated with a pinch of salt”.

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