Should Oil Companies Reconsider Long-Term Upstream Investment?

By Salman Ghouri - May 31, 2017, 12:30 PM CDT

Ever since the invention of internal combustion engine (ICEs) way back in the early 1900s, the demand for cars has continuously been on the rise. The new way of transportation not only made mobility of people easy and faster (compared to horse-coaches), but also represented a major driver for the oil industry.

Today about 70 percent of oil is consumed in transportation sector – road, air, rail, sea. Bulk however, is associated with road transportation. At the end of 2015, the total number of ICEs vehicles increased to 1.2 billion, representing about 60 percent of total global oil demand. The major drivers of global oil demand has been associated with economic growth, population growth and oil prices. Therefore, these factors are always critical in oil and gas companies’ investment decision making process apart from other technical and uncertain parameters.

If oil and gas companies perceive higher demand and higher oil prices over the longer horizon irrespective of what oil prices are today, they opt to make capital investments in upstream business, even in high-cost projects, as the obvious reason is to achieve their corporate objectives of growth and profitability.

Generally, most of the companies rely on the forecast of international agencies, such as the Energy Information Administration (EIA), International Energy Agency (IEA), BP- Energy Outlook and other energy consultancy reports. Even though, generally some companies do carry out their own forecast, management tends to prioritize research that includes comprehensive data and models including long-term forecasts. The question is how accurate are these forecasts and how could it influence companies’ investments decisions.

We have jotted down the forecasts of the Energy Information Administration (EIA), International Energy Agency (IEA) and BP energy outlooks for various years for which data is available.
Global oil demand and oil price outlook from EIA’s point of view
The data on global oil demand and oil prices were gathered from the EIA Annual Energy Outlook (AEO) and International Energy Outlook (IEO).

The EIA anticipates that global oil demand will continue to grow, reaching around 121 million barrels daily (mmbd) in its reference case in 2040. Interestingly enough, despite significant changes that are taking place in global energy landscape like penetration of electric vehicles (EVs) and the rapidly increasing role of natural gas and renewables, EIA did not change their oil demand outlook. In fact, in each of the succeeding years their oil demand outlook became stronger and stronger. The reason being that EIA probably still believes that the penetration of EVs and renewable may not have significant impact on global landscape in the years to come in contrast to many other analysts.

The EIA long-term reference oil price forecast also depicts that over the longer horizon the oil market is likely to remain tight and therefore, oil prices will continue to rise. Were the EIA’s oil demand scenario’s to become reality, this would be good news for oil and gas industry as it will motivate them to continue to invest in upstream and downstream businesses.



Global oil demand outlook from IEA prism

In contrast to a bullish EIA, the International Energy Agency is sensing the greater element of uncertainty as they formulated three types of scenarios. Current, New Policies and the 450-Scenario.
As far as Current Policies are concerned, IEA’s thinking is align with the EIA. Oil demand continues to grow strongly reaching about 121 mmbd in 2040. While in the New Policies Scenario, oil demand continues to grow steadily, reaching about 107.7 mmbd in 2040. Under New Policies Scenario, IEA anticipates that a combination of policy action to promote more efficient oil use and switching to other fuels and higher prices will partially offset the global oil demand as compared to current Policies.


In its 450-Scenario, IEA strongly believes in a successful implementation of the Paris agreement on climate change. It finds that the era of fossil fuels appears far from over and underscores the challenge of reaching more ambitious climate goals. IEA in their 450-scenario (2016) predicts that oil demand will go down to 74.1 mmbd in 2040, 2.2 mmbd higher than they projected in 2015.
Global oil demand outlook from the BP prism

Up until 2016, BP analyses wasn’t that different from the EIA’s and IEA’s as far as global oil demand is concerned. In their 2017 report, the company reduced its global demand outlook to 106 mmbd in 2035 as compared to its 2016 projection of 112 mmbd. In its 2017 report, the company takes into consideration the penetration of EVs. It believes that by 2035 total number of EVs would reach to around 100 million displacing 1.2 mmbd of oil.


What can oil companies learn from this analysis?

Oil company management should be open minded, looking around as to what is happening both within and outside of the industry, in particular the auto-industry and renewables sector. The reason being that lion share of oil demand is associated with the transport sector. Any innovation whether in terms of efficiency or market penetration of electric, natural gas, hybrid or fuel cells, autonomous powered vehicles could displace significant amounts of global oil demand.
Additionally, the rise of renewable energy is no secret, the cost of wind and solar energy came down drastically in recent years. According to investment bank Lazard, the cost of renewable energy has decreased dramatically since 2009, in the case of utility-scale solar by 85 percent and in the case of wind power by 66 percent. Consequently, in certain environments, renewable energy is already cheaper than electricity from conventional coal or gas plants.

Global Primary Energy Mix under New Paradigm?

In 2000, oil was the dominant source in the global primary energy mix, accounting for 38.7 percent, followed by coal 24.4 percent, natural gas 23.7 percent, hydro – 6.78 percent and nuclear 6.43 percent. During the last one and a half decade, the share of oil slipped to 32.94 percent, while coal increased to 29.2 percent, natural gas and hydro respectively marginally up to 23.85 percent and 6.79 percent while renewables emerge as new form of primary energy stood at 2.78 percent in 2015.

Source: BP Statistical Review of World Energy June 2002 and June 2016

Rational of this Paradigm shift

In my personal view the role of fossil fuels will grow smaller in the next 2-1/2 decades from 86 percent in 2015 to 66 percent in 2040 due to penetration of renewables as the world is moving fast to implement the Paris accord on climate change. The role of oil and coal respectively is likely to plunge to 20 percent and 18 percent in 2040. While the clear winner would be more environmentally friendly natural gas and renewables. Natural gas and renewables (solar and wind) in particular will be substituting coal in power generation. By 2040, the share of natural gas will climb up to 28 percent, nuclear 6 percent, hydro 7 percent and renewables will see the most significant increase: to 21 percent.

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Source: BP Statistical Review of World Energy June 2002, June 2016 and Author’s.
In my opinion BP’s and IEA’s new policies scenario are still conservative. I strongly believe that the penetration of EV’s, efficiency, natural gas vehicles, hybrid or fuel cells, electric autonomous vehicles, biofuels and renewables are expected change the energy market faster than many may think. A recent study by the Boston Consulting Group (BCG) concluded that by 2030, a quarter of all miles driven in the U.S. will most likely be in autonomous vehicles. In recently published article by Jillian Ambrose "Why the market for fossil fuels is all burnt out?” highlights the thought process of Dr. Prof Dieter Helm who strongly believes that the era of expensive oil is over and in fact the demand for oil will further diminish with fast penetration of electric vehicles (EVs) and driverless vehicles. Another energy futurist, Andreas de Vries, recently published an article titled “Wake up call for oil companies: electric vehicles will deflate oil demand”, in which he predicted that under the reference case the penetration of EV’s, natural gas vehicles, hybrid-vehicles will displace 13.8 mmbd by 2040. According to Bloomberg New Energy Finance’s (BNEF) study, EVs will increase global electricity demand by 8 percent – reflecting another forecast from BNEF that EV’s will represent 35 percent of new light-duty vehicle sales in 2040. We strongly believe that these autonomous cars as well as non-autonomous cars would be electric vehicles. As a result, we believe displacement of about 14 to 39 mmbd in 2040 is to take place due to penetration of EVs, NGVs and fuel cell vehicles. This view is significantly different than the view that EIA and BP’s have, however it aligns with the IEA 450 scenario.

Higher investment in oil exploration in anticipation of increasing global demand might not bear fruit in the decades to come as the automotive industry is rapidly moving away from internal combustion engines.

Concluding, oil and gas industry should be cautious and keep an eye on the changing dynamics of the automotive and renewable industries while formulating long-term strategies and investment decisions.
By Salman Ghouri for Oilprice.com

OPEC Is Now Irrelevant – This Oil Price Plunge Is Different

By Salman Ghouri - Nov 02, 2016, 7:00 PM CDT

OPEC Price Band

Not very long ago, oil prices traded at well below $20/b and OPEC anxiously came up with a mechanism which it termed as “OPEC Price Band' $22-$28/b”. The rationale for this price band, was that OPEC members would find it sufficient for the growth of their oil and gas industry while the price was high enough to meet their government budgetary requirements. However, only a few years after this mechanism was introduced, oil prices exploded upwards and OPEC was forced to abolish its own price band in favour of higher oil prices.

Burgeoning Oil Prices – OPEC Fortune

Oil producers always look for higher oil prices, and why not? It improves profitability, makes more funds available for the development of oil and gas resources and meets the ever-growing budgetary requirements of the governments.

Oil prices rose higher and higher, and in July 2008 peaked at $147/b – good news for oil producers and oil exporters but painful for the oil importing countries and particularly for consumers.
There are many reasons for the rise in oil prices since 2003 - market fundamentals, civil unrest/strikes in some of the major oil producing countries, the flip/flop of inventories, speculators, hurricanes, conflict in Middle East, and higher cost of production. Shortly after these record prices, the world witnessed the abrupt collapse of oil prices to below $40/b in late 2008 and early 2009.
Surprisingly, oil prices then bounced back and remained over $100/b for quite an extended period of time before plunging back below $30/b.
The key developments in oil prices from 2007 to September 2016 are highlighted in the following bullet points:

• 2007-2008 – Over a 20-month period, oil prices (average monthly Brent) moved up from $53.68/b in January 2007 to 113.02/b in August 2008 (July averaged $133.16, though oil prices went as high as $147/b). Only 6 of these 20 months saw oil prices above $100/b, averaging $88.59/b over the period.

• 2008-2009 – Over a 7-month period (Sept 2008-March 2009), oil prices moved down from $98.13/b in September 2008 to $40.35/b in December 2008, averaging $56.58/b.
• 2009-2014 – Over a 64-month period (April 2009-July 2014), oil prices remained above $100/b for 42 months, averaging 97.89/b.
• 2014-2016 – Over this 26-months period (Aug 2014-Sept 2016), oil prices moved down from $106.64/b in July 2014 to $46.69/b in September 2016 (with a low of $30.75 in January 2014), so far averaging $54.33/b. However, since August 2015, average monthly oil prices have remained below $50/b. Related: Is This The Beginning Of The End For U.S. Nuclear Power?

OPEC’s Successful Policies

In the past, whenever oil prices have slumped OPEC would help them to recover promptly through the sincere and concerted efforts of OPEC members. So, what is different this time? Oil prices have remained well below $50/b or hovering close to $50/b over extended period of time. Why are OPEC members not happy with the oil price tag of $50/b as compared to the old OPEC price band of $22-$28/b? Will OPEC be able to steer oil prices to its desired levels, enabling its members to meet their respective government’s budgetary requirements (ranging from $47 in Kuwait to over $215/b Libya)? If not, then what should be done to keep their economies afloat without heavy reliance on the oil and gas sector?

A Dilemma for OPEC Policies

When oil prices tumbled down after mid 2014, OPEC discovered that the main culprit was the booming U.S. shale oil industry. The cartel had to decide how to deal with this new emerging threat. The decision was between living together in a competitive market or attempting cut the emerging shale industry at the knees by means of sustained low prices.
OPEC decided to take the later approach. Instead of taking cost cutting measures to meet the new challenges from U.S. shale oil and diversifying their oil based economies, they flooded the market. A clear intent was to keep oil prices low and knock out U.S. shale oil producers in order to maintain market share. The perception was that in just a few months, the U.S. shale oil industry would have perished, unable to cope with the lower oil price environment over an extended period of time.

OPEC Policies Back Fire

Contrary to their expectations, U.S. shale oil production did not decline as much as anticipated. In fact, OPEC - hurt by their own action of flooding the market - kept the oil prices lower for longer still. The cartel was seemingly unaware of the speed of technological advancement that continues to bring down breakeven prices for shale. Advances in drilling technology, optimized resource management policies and the smart use of hedging have allowed the U.S. shale oil industry as a whole to stay afloat even as bankruptcies pile up.

The consequences of a prolonged period of softer oil prices has now started to pinch OPEC nations themselves. The plan to defeat shale oil producers backfired. Middle-East stock exchanges, fiscal policies and economic growth became the immediate casualty of this strategy. Efforts were made to reduce fiscal deficits by improving non-oil revenues and other austerity measures including cutting subsidies, but are these measures enough?

What is Different This Time?

With no alternative choice, OPEC went back to its old wisdom of manipulating oil production as it has done so successful in the past. Knowing that this time around, this monster task cannot be accomplished without the support of Russia, so efforts were made to motivate Russia to board the sinking ship. Russia needed to join due to its economy reeling from low oil prices. In the past few months, the news of such freeze/production cuts has had an impact on market sentiments the same way as it had in the past. That is, any news of a production cut or freeze pushed and prodded oil prices upwards. Repeatedly, OPEC’s members failed to agree on a tangible production cut, asking to be exempted for their own political and economic reasons.

Mediocre cash flows have pushed oil producers to up output even further. Both Russian and Saudi Arabian production was up over 11 mmbd, despite weaker global oil demand. Consequently, oil prices remained subdued as the supply glut continued unabated. Oilprice.com’s Andreas de Vries and Salman Ghouri recently published an article on the 5-negative factors for oil prices that highlights why oil continues to sell off.

Challenges for the oil industry in the short/long term

U.S. shale oil remains the biggest threat to the industry and oil prices over the short-medium term. While structural changes in the automotive industry and the rising role of renewables are yet another threat that challenges the survival of oil in the medium to long-term.

U.S. shale is not only reducing break-even cost, but they also learned how to respond to changes in oil prices. A good example of this is the reduction in well completion. DUCs were piling up as oil prices remained under $50. At the end of September 2016, the number of DUCs were up to 5069 from 3698 in December 2013. In contrast, the number of DUCs declined when oil prices went above $50 as the chart below shows.

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Figure-1: US shale oil drilling profile

How Responsive Is U.S. Shale Oil to Oil Prices

As far as future of U.S. shale oil is concerned, if oil prices are allowed to increase from $50/b to $80/b due to OPEC and Russia’s successful collaboration, the question is how long it takes shale oil to respond?
The Author published a paper “Will OPEC Use This Strategy To Defeat U.S. Shale?” which highlights that if oil prices are allowed to increase from $50/b to $78/b between March 2016 to December 2020 how U.S. shale production would respond to price changes. In the reference case, U.S. shale oil production from the Bakken, Eagle Ford, Niobrara, Permian and Utica responded due to the increase in oil prices, surpassing their respective peaks to date. By December 2020, total U.S. shale oil production from the given seven basins is forecasted to increase to 6.78 mmbd – an increase of 48 percent compared to 4.86 mmbd in September 2016.

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Figure-2: US Shale oil forecast March 2016 to Dec 2020.

What Can The Oil Industry Do To Improve Their Odds?

The oil industry should realize sooner or later that the era of $100/b or over is technically over. The underlying threats are real and they should develop alternate strategies for their own survival. Moreover, oil dependent countries should also look for other options to reduce their reliance on oil based revenues, removing subsidies and introduce tax reforms are just two options to avert a major economic downturn.
By Salman Ghouri for Oilprice.com

Ahead Of The Pack: What Sets Energy Innovators Apart?

By Salman Ghouri - Jan 16, 2018, 1:00 PM CST

In order to formulate a long-term strategy — for business or otherwise — you must learn to anticipate the future.

We can visualize how the world will evolve by analyzing GDP and population growth patterns, environmental challenges, trend preferences, global demand/supply, structure changes within and across the industries, technological advancements, the Paris Climate Accord, etc.
Here in 2018, attempting to perceive how the world will be in 2030 and beyond isn’t an easy task, but if we consider the above and some other geopolitical, socio-economic, cultural and wild card factors, we can somewhat predict how they will affect our businesses or competiveness.

Perception about the future varies from person to person depending on their educational background, experience, knowledge and ability to see what’s behind the thick forest. For example, some of us believe that beyond 2030, structural changes in the auto and power industries will cause a diminishing role of fossil fuels (particularly oil and coal) and an increase in renewables and natural gas. This perception is based on factual changing ground realities like technological advancements, growing climate concerns, new government agreements, honoring the Paris Accord, etc.

More than three years ago, Andreas and I began writing on the technological advancements and structural changes in the auto industry to predict how penetration of electric vehicles will displace a sizable global oil demand in road transport sector, and how the speedy penetration of wind and solar energies will reduce the role of fossil fuels in global total primary energy mix from 86 percent in 2016 to less than 75 percent in 2040. 

It wasn’t long before almost all the major car companies and several countries around the world decided to go electric/green. Peak oil was the talk of the town. All of a sudden, the top brass woke up and began cranking out new processes.  
Bottom line: Some diligent companies have already added renewables to their portfolios and will stand out as the clear winners, while the others struggle to reconcile with reality.
A number of oil-producing countries are formulating strategies to diversify their highly oil-dependent economies away from oil. Even power companies like General Electric and Siemens are realizing renewables’ future and formulating strategies accordingly.

When attempting to shape future predictions, start with brainstorming sessions in which you analyze the present, and how the changing dynamic of the aforementioned factors might affect your future businesses. Identify challenges and think about how to convert them into opportunities.
What appears to be nonsense today often turns out to be tomorrow’s reality.

By Dr. Salman Ghouri for Oilprice.com

How Will Fossil Fuels Fare In 2040?

By Salman Ghouri - Dec 23, 2017, 12:00 PM CST

Fossil fuels have been the dominant source of energy for global economic prosperity for over 150 years.

In 2016, fossil fuels overwhelmingly account for over 85 percent in global total primary energy consumption (TPEC)—but what role will they play in 2040 and beyond? There’s an ongoing debate among various agencies, researchers and academia whether the role of fossil fuels will significantly diminish.

The innovation in fuel cells, electric vehicles and the significant decline in cost of solar and wind power are fossil fuels’ greatest challenges. How much of fossil fuels’ share will be taken by renewable sources by 2040, and is it substantial enough to undermine the role of oil and gas industry, or is there no need to worry?

The oil industry is transforming due to the auto industry’s structural shift from internal combustion engine (ICEs) to electric vehicles (EVs), reducing global demand. But this will create additional electricity demand. In 2016, out of the global total population of 7.3 billion, more than 1.5 billion (20 percent) people are without electricity, and over billions only for a few hours. In order to meet the power demand of global population, the industry will need trillions of dollars in power generation, transmission and distribution system. Naturally, trillion-dollar investment is required here.
History shows us that countries with higher per-capita energy consumption experience stronger economic growth. This relationship is even stronger with electricity consumption. So for global economic prosperity, power is the prerequisite for takeoff. Coal still remains the dominant source of electricity generation. However, under the umbrella of the Paris Accord, all countries—particularly the major coal-consuming countries for power generation, like China and India—plan to shift toward clean energy.
As such, general perception is that natural gas gets a free ride since it’s replacing coal. However, the speedy developments of renewables, particularly wind and solar, seems to dash this perception. During this learning-curve journey, global wind and solar energy capacities respectively increased from 59 GW and 5.6 GW in 2005 to 486 GW and 306 GW in 2016, backed by a substantial decline in prices (Figure-1 & 2).

(Click to enlarge)

Natural gas resources are located far from the major consumption centers—43 percent alone in the Middle East, and Africa at 7.6 percent. In contrast, consuming countries are located in developed areas, and now the thrust is shifting to Asia. The Asian region, where 60 percent of world population resides, has the capacity to consume the bulk of natural gas; however, it’s constrained by its availability, infrastructure and transport expense. In 2016, out of 3543 bcm total global natural gas consumption, 69 percent was locally consumed, 31 percent traded as pipeline (737 bcm) gas and LNG (347 bcm). Furthermore, the natural gas spot market is in its infancy, therefore the bulk of gas is sold under long-term contracts.

In contrast to natural gas reserves, almost all the countries are endowed with enormous sun and wind resources. Renewables nurtured on the laps of government subsidies have matured, and prices have significantly declined (Figure-3). For example, take the recent announcement of record-low auction prices as low as three cents per kilowatt-hour, including India, the United Arab Emirates, Mexico and Chile. Global average generation costs are estimated to further decline for 2017-2022. We also recently learned that auction prices indicate much steeper possible cost reductions, ranging from $30-45/MWh for solar PV (India, Mexico, United Arab Emirates, Argentina) to $35-50/MWh for onshore wind (India, Morocco, Egypt, Turkey, Chile). Therefore, natural gas should no longer expect to get a free ride as it gears up to substitute coal. Instead, it should brace for stiff challenges from renewables.


Despite challenges and constraints, the role of natural gas in TPEC is up from 24 percent (2016) to 30 percent (2040), but the biggest gainer will likely be a renewable that’s likely to go up from 3 percent in 2016 to around 12 percent to 15 percent in 2040.
One can argue the 12 percent or 15 percent numbers, but it’s certain that the penetration of renewables in power generation undermines other sources of energies.

An advantage of renewables is that there’s not necessarily a huge upfront capital investment in the transmission system. Solar panels and wind farms can provide electricity to the community without big investments in their transmission systems, especially when populations are scattered in developing countries, thus overcoming the hurdle of transmission cost/constraint.
Oil’s share will be hit hard, and could shrink from 33 percent in 2016 to around 25 percent in 2040 due to EVs and increasing ICE efficiency. Coal, once the dominant source in power generation, could decline from 28 percent in 2016 to 20 percent in 2040. Regardless, many countries with abundant coal resources and limited alternative sources will carry on as usual.

Availability and competitive prices are important. For example, in the United States, due to the shale gas boom’s big difference, power generation from coal down dropped from 53 percent in 2007 to around 30 percent in 2016. As such, the role of fossil fuels is expected to drop from 85.6 percent in 2016 to around 75 percent in 2040. The role of hydro and nuclear should remain at their current level of about 7 percent and 6 percent in 2040.

For natural gas to gain strong footing and capture market share of 30 percent in TPEC requires a lot of innovation and outside-the-box strategy. Rather than selling big LNG quantities, they should consider smaller quantities (like selling to grocery stores rather than wholesale markets). In order to achieve this strategy, they need to look back at history—rather than looking for big trains like 7.8 MTPA and larger, companies should look for smaller size trains, LNG carriers, and even FSRUs to meet the demand of a large number of smaller customers.

Along with power and industrial sectors, the natural gas industry should focus on marine fuel (particularly the shipping industry) and look for markets in Africa, Central America, and South America rather than focusing only on traditional Asian markets.

It’s time to create demand for natural gas where resources are located rather than only looking at the capital-intensive export options. A sizable natural gas reserve (7.6 percent) is located in Africa. Over 16 percent of the global population resides there, with most generally deprived of power—still struggling to take off. The regional per capita energy consumption is around 15 million btu, compared to Asia’s 50, with developed regions close to 200.

There’s much potential in Africa, Central America, and South America. It will require a strategy to create opportunities via investments in integrated projects in these areas with rich resources and poor economies, which could then generate increased regional economic activity. At last, these countries could finally utilize their indigenous energy resources.
By Dr. Salman Ghouri
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Two Undeniable Shifts In Today’s Energy Markets

By Salman Ghouri - Oct 25, 2017, 4:00 PM CDT

A couple of huge structural shifts are coming for the energy sector over the next few decades, thanks to the growth of certain technological and environmental challenges.
The first challenge comes from electricity generation, which impacts the demand for coal and natural gas. The second challenge is from transportation changes, as the shift away from the internal combustion engine to the electric drivetrain will hit oil demand, particularly from the transportation sector.
Without question, electricity is by far the most important source of energy for global economic growth and human prosperity There’s a strong positive correlation between electricity consumption and economic growth, regardless of whether it’s generated by coal, oil, natural gas, hydro, nuclear or renewables, the end result is power generation that’s critical for the progress of humanity. Electricity is needed to run our industries, commercial usage, lighting, cooking, heating and cooling and even required for the transport sector. Life pauses when there’s an electricity outage—a disruption in communication systems makes us feel helpless.
Demand for electricity is expected to grow strongly due to the rapid global economic and population growth. Right now, over a billion people don’t have access to electricity, and billions of those who do have access only have it for a few hours a day. As economies of emerging and developing countries are poised for growth, demand for electricity is expected to grow strongly. Furthermore, additional demand for electricity is expected to result from a structural shift in the transportation sector.
Historically, coal has been the major source of electricity generation, and in 2015 accounted for about 40 percent of total power generation (large emerging economies such as China and India use more coal, 72 percent and over 65 percent of their total power generation mix, respectively). However, due to environmental challenges and the Paris Climate accord, the way we generate electricity is set to change.
Related: This Oil Rally May Be Short-Lived
According to the EIA-IEO-2017, renewables (including hydropower) are and will be the fastest-growing sources of electricity generation from 2015 to 2040. Total renewables are projected to grow at an annualized average rate of 2.8 percent per year, while natural gas generation is poised to grow by an average of 2.1 percent per year from 2015 to 2040, and nuclear generation is set to grow by 1.5 percent per year.

The biggest game changer is perhaps the penetration of renewable in electricity generation substituting coal. Hydropower’s share in renewable generation, however, is expected to fall from 71 percent in 2015 to 53 percent in 2040 due to environmental concerns limiting the development of a number of new mid- and large-scale hydropower projects. Therefore, major growth is expected to come from wind, solar and natural gas. Incidentally, coal’s generation share is expected to decline from 40 percent in 2015 to 31 percent (or even well below 30 percent) by 2040, and renewables share is expected to rise from about 19 percent (including hydropower) in 2015 to 31 percent or even more in 2040, when fusion energy becomes a commercial option.
Oil is currently the single most important source of energy being used in transportation sector—road, air, rail and sea. Since the invention of internal combustion engines (ICEs) in the early 1900s, oil demand has been on the rise. By the end of 2016, over 96 million bpd of oil were consumed, of which over 64 percent has been associated with transportation sector.

Due to increased efficiency in ICEs, and the rapid rise in EVs, autonomous vehicles, hybrid-cars, CNG and fuel cell vehicles, oil demand should decrease in years to come. As such, global oil demand will peak and then taper off. By 2040, oil demand is could range between 70 and 80 mmbd (instead of reaching 121 mmbd as predicted by the EIA and other agencies). The main reason for this demand drop includes significant improvement in miles driven per gallon, and of course, the rise of EV’s. Just a few years ago, mass-appeal electric transport seemed a distant reality, but today, no one can ignore this mammoth change happening in the auto industry, especially when more than 64 percent of oil demand is associated with transportation.

Over time, global electricity demand will increase significantly, and most new generation will come from renewables and natural gas. Coal’s role is expected to shrink to below 31 percent from the current level of around 40 percent. Technological advancements have pushed down break-even costs and many projects are now viable without government subsidies. Next to renewables, the role of natural gas in power generation is poised to grow significantly. All these efforts will help in achieving Paris climate accord targets.

The shale gas boom has allowed the United States to curb the use of coal in power generation. Coal’s share in U.S. power generation fell from 48 percent in 2007 to about 30 percent in 2016. The natural gas contribution, however, went up from 22 percent in 2007 to 33.8 percent in 2016, thanks to the commodity’s falling price. If such a shale gas boom could be replicated in China and India, coal’s place could fall well below 30 percent in 2040 and help in mitigating the impact of energy usage on the environment.

While these major shifts could make the world more prosperous and environmental friendly, the trends could have a detrimental impact on countries that rely heavily upon oil revenues.
By Salman Ghouri for Oilprice.com

The Single Most Important KPI For Oil & Gas Companies

It is no secret that the CEOs, owners, shareholders and creditors are curious to know how a company is progressing. If there was only one KPI that could measure the overall performance of a multinational Oil & Gas company, which one would those with a stake in the company choose?
In every organization, there are a number of Key Performance Indicators (KPIs) which help to assess its financial health, physical performance, operational excellence and health, safety and environment (HSE).
It is often seen that management develops a series of KPIs for each category and displays it on the management dashboard to assess the health of the organization. The objective of such KPIs is to facilitate appropriate and timely decisions in order to steer the company towards its set objectives. For each category, there could be many KPIs, all of which may be of equal importance. However, if the shareholder or CEO or creditors are interested in one single KPI, which one should be given greater emphasis and why?
Any layman can suggest the main objective of any oil and gas company is to maximize profit while increasing the value of the company year after year. In order to do this, the company must generate more revenue while cutting costs. To achieve this, the company must enhance its oil and gas production year after year. For the sake of discussion, we are assuming that oil prices are to hover around $50/bbls for many years. This would suggest that revenue and profitability hinges on the level of production, while remaining vigilant on cost.

This is to say that a company needs to continually invest its financial resources in exploration and development activities to broaden their portfolio. The greater the proved oil and gas reserves added to the company’s resource base, the greater the value of the company.

Maximizing profit increases the value for shareholders, but oil and gas companies must continue to produce more in succeeding years. The problem with this, however, is that production of oil and gas resources today, means that a barrel of oil produced today will not be a part of the portfolio tomorrow. That is, with the production of each barrel of oil, remaining proved reserves will deplete unless new reserves are added to replenish the quantity produced. This is what is called the Reserves Replacement Ratio, and it is one of the KPIs CEOs and shareholders would be interested in measuring to assess the overall performance of the organization.
If the company were to fail to discover and add new proved reserves, its available resources would eventually be exhausted, leaving the company in a rather difficult position.
This ratio is especially important as it provides a glimpse into the overall health of the company, including how well the company’s upstream operations are performing – are they acquiring enough blocks, acreage, drilling exploratory wells and making enough discoveries? Failure to achieve this single KPI means the company is unable to increase oil and gas production year after year, reflecting negatively in the financial performance of the company’s profit & loss statement.
By Salman Ghouri for Oilprice.com

What Does OPEC Do Next?

Time is of the essence. If you fail to comprehend future market conditions and fail to steer the ship in the right direction, it can lead to disaster. This is what we have learned during the past few years. OPEC’s failure to understand the future market conditions and speed of technological advancements has resulted in economic setbacks.
A 2012 paper about the role of U.S. shale oil in global oil markets suggested that “It could be in the interest of OPEC to already increase its production now and allow oil prices to decline to below $60 to discourage further development of shale oil”. The industry, and more particularly OPEC, continued with their “business as usual” strategy, unaware of the dramatic impact U.S. shale would have on oil prices.
$100+ oil prices allowed companies to master the fracturing technology. As a result, the shale industry was able to increase average productivity per well by employing advanced horizontal drilling techniques, multi-stage fracturing and concentrating towards the most productive areas of the basin. For example, oil productivity per rig for the Bakken increased from 112 b/d in January 2007 to 746 b/d in March 2016 – over 6.6 fold increase. Improvements were also made in terms of Estimated Ultimate Recovery (EURs) which in some of the basins reached 50 to 60 percent in 2015/16.
The higher U.S. shale oil production started to take its toll on oil prices in the second half of 2014. To counter the new enemy (shale oil), OPEC, contrary to its traditional tool of curbing its own production, flooded the market for an extended period of time, explaining that it was merely defending its own market share and assuming that such policy would incur permanent damage to the U.S. shale industry.

Having executed this strategy for over 2 years, OPEC realized that the continuation of such a policy was quite detrimental to the economies of its members. Most OPEC members had to take some unpopular decisions to curb government expenses, including downsizing, drastic cost cutting measures, removing subsidies and cancelling megaprojects. All these efforts provided them with some breathing space and also avoided complete economic collapse.
Eventually, OPEC reverted back to their old wisdom of cutting oil production, which saw oil prices creep up to the mid-fifties. The oil bust taught them a good lesson and made them realize how dependent their economies are on oil revenues. A good example of this is the Saudi Vision 2030 diversification plan, which is aimed at reducing reliance on oil income.
Oil prices around $50 might provide some relief for OPEC countries, U.S. shale producers directly responded and the number of drilling rigs substantially increased in the last couple of months. And now the U.S. shale patch has brought break-even costs per barrel down even further, Shale oil production could even increase as oil prices fall below $50 per barrel again.

Offering some clues on how the cartel could defend its market share, an article by the author, published last year on Oilprice.com forecasts the responsiveness of U.S. shale oil production against various oil price scenarios.

In the base scenario, if oil prices gradually increase to $78/bbl, than by December 2020, total U.S. shale oil production from the given seven basins would increase to 6.79 MMBPD – an increase of 37 percent compared to March 2016. In contrast, under low oil price scenarios (range of mid thirties and mid twenties), shale oil production would decline in all the basins and by December 2020 would fall to 3.03 MMBPD, a decline of 67 percent compared to March 2016.

The hard lesson learned during the past few years is that due to technological advancements, U.S. shale oil producers can lower their breakeven prices and challenge OPEC’s market dominance.
One strategy, if OPEC aims to harm U.S. shale oil producers, is to stop intervening in oil markets, provoking a drastic fall in oil prices – possibly back to $30 per barrel. Such a drop in crude prices could crash shale oil production in almost all the seven U.S. basins. By the end of 2020, their cumulative production could fall down to 3.03 mmbpd. This could potentially evaporate excess global supply, however, this strategy will once again have a devastating impact on the economies of individual OPEC members. As such, OPEC are unlikely to initiate such a self-defeating strategy.
Higher oil prices of over $60/bbl on the other hand, will allow most of the seven shale oil producers to increase production, keeping oil prices in a narrow range. In such a scenario, oil prices within the range of $50 to $60/bbls will balance the global demand/supply and will not be detrimental to either producers or consumers.



By Salman Ghouri for Oilprice.com