Post COVID – A Difficult and Painful Journey Ahead!

Dr. Salman Ghouri

The year 2020, started with different kind of challenges. Challenges that most of us have never experienced in our life. The invisible enemy that spread the havoc around the world – sparing no one irrespective of religion, caste, where you live - it globally. As of April 29, more than 3.2 million people have been infected and over 220 thousand deaths across the globe have occurred. Though in Europe and some other countries, there has been a decline in recording of new cases and deaths as well. While for others, it is just the beginning particularly in Asian and African countries where covid started spreading late.

Despite the world being geared up with the latest state-of-the-art technology, thousands of nukes, supersonic aircrafts, missiles, chemical weapons etc. Yet all of those are worthless against invisible enemy. A tiny virus that is hard to detect under powerful microscope had a havoc and did not spare any nation – forcing most of the countries to partial or be on a complete lock-down for months. The hardest hit has been in Europe and North America. Initially majority of nations did not take this pandemic seriously. Even though after over 3.2 million effected and 220 thousand deaths, some are still thinking that it is nothing but a conspiracy! 

The world is helpless as thousands of people are dying every day around the world. In the absence of vaccine, different medications have been tested – like chloroquine and antibiotics. In some patients it has worked but generally in most it has not. The only way to deal with this havoc is to lockdown the cities entirely – leading to social distancing until a development of vaccine. This has helped to improve the spread of virus but at the economic cost that now is estimated to be well into tens of trillions of dollars.

The rapid spreading of COVID-19 around the world led to global recession as well as plunging oil demand – as fewer cars are on the road, only handful of flights taking off, partial or full shut-down of factories/industries. The world is at a stand-still. It has affected the livelihood of small to large scale business such as: restaurants, aviation, hotels and tourism industries, doctors’ private clinics, retail shops, daily wage earners, and the list goes on.

According to the International Labor Organization (ILO), some 1.6 billion workers in the informal economy, representing nearly half of the global labor force, are in immediate danger of losing their livelihoods due to the covid pandemic. Aviation industry however, is one the worst-hit. World air traffic suffered a massive drop of more than half in March 2020, compared with the same period last year. The stories of other industries are no different, all having suffered. It is too early to determine the extent of damages so far occurred.

The question is what will happen if one fine morning we get up and find ourselves in a world of COVID free environment.  

The physical, mental, economic and financial distress created by this short episode may remain with us for many years. The world would be needing tens of trillions of dollars to clean up this mess and bring back all the industries, including all other directly and indirectly associated business to pre-COVID environment. The economic and financial destruction caused by COVID in few months, may requires years to repair. Yet physical and mental agony may require countless years. The recovery from the aftermaths of COVID would not be possible without each other support. It is not that simple. It may require financial support of donor agencies (IMF, the World Bank, IBRD, ADB, IDB etc) in the form of write-offs, debt relief and further financial assistance, particularly the developing countries. Moreover, developed countries support is also needed in painful journey of recovery.

Due to the lockdown global oil demand far exceeded its supplies, which was further exacerbated by OPEC strategy of over production. In this painful journey of lower oil prices many US shale oil producers and small producers are forced to shut down while many will go out of business.  As the world storage nearing capacity oil prices slipped down hill and once declined to negative $37.63/bbl May contract.   

The world is in catch-22 situation. On one hand, if oil prices remain softer – post COVID, it will be a blessing for the global economic recovery from the aftershocks of COVID. Savings out of reduced oil import bill would be spent to fix the devastation caused by COVID that requires significant amount of resources.

While on the other hand, lower oil prices over extended period of time has already severely affected the oil industry. The lower oil and gas prices with global weak oil and gas demand has significantly reduced companies’ revenues, profit, cashflows, which would be poorly reflected on companies’ profit & loss and balance sheet. 

They already incurred huge losses and therefore less resources are available for future investments in exploration and production (E&P). A research conducted by Rystad Energy, estimated that E&P companies’ revenues are set to plunge by around $1 trillion in 2020, as compared to $2.47 trillion last year. They were also of the view that 2020 might be the year marked by the lowest project sanctioning activity since 1950s in terms of total sanctioned investments, which stands at $110 billion – only 33% compared to 2019. Many companies have already abandoned or deferred their major projects as well as reduced dividend payments. Shell, for example, is among the first major oil and gas company slashing its dividend by 66%, from $0.47 to $0.16 per ordinary and B ordinary share. On May 1, 2020, ExxonMobil reported estimated first quarter loss of $610 million and also announced 30% cut in its capex for 2020 to $23 billion, compared to $33 billion earlier announced.  While other companies to follow soon.

What does all this mean? Subsequently, inadequate resources would affect the supply side which is now in surplus.

If this happens, dynamics of natural cycle would be repeated – mismatch in demand/supply. During this cycle, oil demand in the post-covid recovery period will exceed supplies. As less resources at oil industry disposal to enhance production (at least in the short run). The world would soon witness increasing trends in oil prices till new equilibrium is restored, albeit at a higher price. The world has witnessed various cycles in the past. Yet the current cycle is more deep and painful as it is accompanied with invisible enemy (covid) that impaired oil demand while sitting on the lap of excess oil supplies.  

OPEC-Plus 10 mmbd production cut: Is it sufficient to revive oil prices?

A dilemma caused by OPEC strategic blunder at a wrong time plunged oil prices below $20/bbl, sending tsunami waves across the world. This strategy was formulated to harm US shale oil producers in particular. Notwithstanding, it hurt everyone not sparing anyone irrespective of major oil companies, shale oil producer and national oil companies. However, it causes more financial damage to OPEC members than others as more than 90% of their GDP is associated with oil-based revenues. Though the extent of economic fallout varies from country to country depending upon the cushion of sovereign funds. It may not be a big deal for Saudi because of huge sovereign funds but it severely affected other OPEC members and probably they are not on board to continue with this strategy.    

This strategy may have worked if there was political will, courage, and resources to hold oil prices to $20/bbl or below continuously well over 24 months. It may have helped to achieve their objective but not without harming and putting the whole oil industry permanently on the verge of collapse, including US shale oil. I believe it was wrong timing when the world is already suffering from the effects of COVID-19, but for OPEC this is the perfect timings to achieve their objectives.

A tiny virus that is hard to detect under powerful microscope had a havoc and did not spare any nation – forcing most of the countries to partial or be on a complete lock-down for months. The hardest hit has been in Europe and North America. Both the regions have the capacity to recover from the aftershocks but it may cause permanent damage to most of the developing countries. 

Fever testing facilities, insufficient infrastructure, hospitals, doctors, nurses, masks, protective gears and the required financial resources to deal with this havoc virus. Therefore, they are not sure about how bad it has affected their population and how bad the fallout of this pandemic on their economies is not fully known; it’s too early to tell. It may take longer time to recover from this dilemma. As we are aware most of the energy demand is associated with developing Asia a home of 60% global population, therefore, one could expect a weaker global oil demand at least a year or two or till these economies are fully recovered.

The surplus caused by over producing during the past few weeks than what is required may take many months to clear. No rocket science is required to assess this grim situation caused by COVID-19 and manmade crisis. Most of the countries are partially or in complete lock down and so are most of the industries. Aviation industry is nearing bankruptcies – only fewer flights are operating, only few vehicles are on the road – less oil is consumed. Knowing all these parameters still if one conjecture that global oil demand may have reduced by 10 mmbd is wrong assessment. Therefore, 10 mmbd cut in production is probably a few drops taken out of sea to clear the surplus. A surplus caused by over producing and weaker global oil demand. It means oil prices will remain very low for many months – maybe well into 2021 depending upon the speed of full recovery of global economy from the aftershocks of COVID particularly developing Asia. During the crisis, against global oil demand of 50-6 mmbd if you continue to produce 90 plus mmbd how you are going to clear the surplus! In order to absorb this surplus, it requires more than 10 mmbd production cut at least during the recovery period. If they continue to implement 10 mmbd production cut policy it means lower oil prices stretching over months, if not years. Eventually you are forced to shut down production due to brimming inventories and weaker global oil demand, therefore, think rationally and not wait for the worst possible scenario.

The other possible scenario which is unlikely is that if COVID hits the supply chain - oil production site including refineries and other petrochemical industries – partially halting production and refining operations or manmade crisis that could threatening supply. This may have a devastating impact on oil prices. Such news probably will instantaneously increase oil prices into thirties-forties and if problem persists over many weeks, it will eventually increase to over $50/bbl irrespective of surplus. The higher oil prices at this critical juncture may be good news for dying oil industry that is already on the ventilators but it would be nail in a coffin for developing countries. Higher oil prices probably push recovery period into years from the aftershocks of COVID-19.  If this happen US shale oil once again mushroom and absorbing considerable market share. This means OPEC once again at a square one position despite having gone through marathon unnecessary painful period!

The Energy Landscape set to change – How it affects destiny of oil & coal in 2040?

The global energy landscape is expected to change – led by natural gas and renewables, undermining the role of coal 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 coal industry?

Fossil fuels have been the dominant source of energy for global economic prosperity for over many centuries. Rapid industrialization was exclusively led by coal in the 17^th and 18^th century. In 2018, fossil fuels overwhelmingly account for over 84.7 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. If yes by how much?  

The dominance of fossil fuel era

Coal that was responsible for industrialization and remains important source for global economic prosperity for over 250 years. Yet today, it is still a major source of primary energy particularly in power generation. Oil was discovered in the US in 1859, but its demand did not grow until the turn of the century when Henry Ford invented the internal combustion engine (ICE). Thereafter the oil demand continues to penetrate and become an important source of primary energy. It ruled the world over a century along with coal. The expectation was that natural gas will become the next important source and expected to rule the current century, partly because of environmental considerations – mostly displacing coal in power generation. This hadn’t happened as yet. The reasons being partly due to major gas resources are located far from the major consuming countries. Moving gas across continent is expensive and difficult. Even laying pipelines across national boundaries pose constraints due to international politics and regional disputes.

Technological developments way back in 1960s allowed the industry to cool natural gas to -161 C, reducing its size by 600 times. In this way bulk of natural gas was transported through specialized LNG carriers – removing the bottleneck of national boundaries issues. Lately, further technological advancements in horizontal drilling and fracking enabled the industry to tap the unconventional both shale oil and shale gas. The USA has now become a major exporter of LNG and competing with Qatar and Australia.

In 2018 oil (33.6%) and coal (27.2%) remained as major sources of primary energy followed by natural gas (23.8%), nuclear (4.4%) and renewable (10.85% including hydro). But this equation is likely to change within the next 2-3 decades or so. Natural gas industry is expected to flourished and gain top spot within the next two decades however, renewable energy will be competing to gain the first spot as well.

Oil industry is currently passing through self-inflicted turmoil pushing oil prices to be below $20/bbl although it has recovered to around thirty. If the lower oil prices prevails for an extended period of time, would affect the future investments. To sustain and enhance current level of production, industry requires trillions of dollars investment in all three streams – upstream, mid-stream and downstream. Moreover, another challenge for oil industry that cannot be ignored is on-going structural changes in auto-industry. Internal combustion engine (ICE) that once allowed auto-industry to flourish and help oil industry grow enormously. The same auto-industry is now posing challenges to oil industry by shifting from ICEs to electric vehicles (EVs). The penetration of electric vehicles, fuel cells and other LPG/CNG based vehicles surely displaced a sizeable quantity of oil. For simplicity we lumped all these types of vehicles and called them EVs. The rational of this theory is that oil demand soon peaked and then declined. There is absolutely no argument about the peak oil demand. It has to come; the only on-going debate is how soon and when?  Generally, most studies are of the view between 2030-2040. My assessment is that it will happen around 2025. In 2015, Andreas and I forecasted penetration of EVs (autonomous vehicles, less desire to buy cars etc.) and the possible displacement of oil demand. Reference case predicted that EVs will displace around 14 mmbd by 2040 while high case is expected to displace over 38 mmbd. My take is that it will displace somewhere 14 -25 mmbd by 2040, depending upon the speed of EV penetration.

Rational for Renewable taking over coal

Coal is still the second most important source of primary energy accounting for 27.2% end 2018. Thirty-eight percent of global electricity has been associated with coal as compared to 23% by natural gas. Compared to the global share of 38%, China and India account for 66% and 74% of electricity based on coal. While Europe and USA  22% and 27% in 2018 (US down to 23% in 2019). Due to greater share of coal in power generation, China is among the 1^st and India is the 4^th largest carbon emitter.

Penetration of renewable and natural gas is expected to undermine the role of coal, which is expected to reduce due to environmental considerations (Paris climate accord) and public awareness. One may argue why now? Well the realistic answer is that natural gas resources are not uniformly distributed – rather biased in favor of few countries. For example, 38.4% (32% in CIS)[i] gas and 48% of oil reserves are associated with Middle East. While major gas consuming countries are located in North America, Europe and Asia. In some countries there is not ample of environment friendly indigenous resources like natural gas that could challenge and displace polluted coal nor there was public pressure on governments.

That is, availability of resources at a competitive price is the major constraint. As such generally, countries prefer to utilize cheaper indigenous resources even though those causes pollution. For example, in the past major chunk of electricity in the United States was associated with coal-based power plants because of enormous coal reserves. In contrast, more environment friendly natural gas reserves were not enough and therefore, US companies invested globally in LNG business to meet US future domestic gas requirement. The shortage of gas kept Henry Hub prices on the higher side and it was not economically advantageous to substitute with cheaper indigenous coal. However, technological innovations - horizontal drilling and fracking techniques helped oil companies to exploit unconventional resources – trap in the form of shale oil and shale gas. US shale gas boom’s resulted in decline in Henry Hub prices substantially and helped in replacing polluted coal with relatively clean natural gas in power generation. The share of coal in the US power generation dropped from 52.8% in 1997 to 23% in 2019, most of it was captured by natural gas. Natural gas share increased to 38.5% in power generation. Therefore, availability and competitive price of a resource are necessary for substitution.

As more and more natural gas is available in the form of pipe and LNG, significant cost reduction in renewable energy due to technological innovations and environmental reasons both natural gas and renewable energy can penetrate energy market. Both China and India have greater opportunity to improve and reduce share of coal-based power generation by substituting for natural gas and renewable. This strategy will help them to alleviate coal emission and achieve Paris climate targets.  

Efforts in achieving Paris climate goals

Since 2010 the growth in renewable has been phenomenal. For example, during 2010/2019 total renewable capacity increased by 106%, hydropower 27%, wind 244% and solar recorded at 12-fold increase. Figures:1-4 depict the historical trends of regional growth in renewable sources of energy. Asia is most polluted region due to home of 60% of global population and holding 27.5% of coal reserves. In contrast to coal reserves, the regions share in global production and consumption is over 65%. Most of which is being used in power generation. Incidentally, both China and India generate 66% and 74% of electricity respectively from coal-based power plants.

Due to public pressure, agreeing on Paris climate targets, most countries are seriously taking measures in cutting down carbon emission. In addition, the substantial decline in cost of renewables help the countries to take advantage in mitigating the role of coal in power generation. At the end of 2019, both China and India are the major producers of hydro, wind and solar energy in the world. Surely, if such efforts continues, they would be able to reduce the contribution of coal in their energy mix. By the end of 2019, Asia is the leading renewable capacity holder – more than 44% of total renewable capacity, 42% hydropower, 56% wind and 42% solar capacity is associated with Asia. Europe is the second important region followed by North America. Up until 2014 and 2015, Europe was the major producer of both wind and solar energies, however, since 2014 (wind) and 2015 (solar) Asia surpassed the European dominance and became the largest producer of hydro, wind and solar energy Figures-1 to 4)[ii].

Figure-1: Regional Total Renewable Energy – GW (Source: IRENA – 2020 report).

Figure-2: Regional hydro power energy – GW (Source: IRENA – 2020 report)

Figure-3: Regional wind energy – GW (Source: IRENA – 2020 report)

Figure-4: Regional solar energy – GW (Source: IRENA – 2020 report)

Figure-5 depicts comprehensive summary of renewable for top ten countries for each of renewable source of energies. Eighty-three percent of global wind and solar, 70% of total renewable and 68% of hydro associated with given top ten countries. China, USA, France, and India are amongst the top ten in all forms of energy. Common countries associated with Europe – Germany, Italy and Spain. Japan is among the top ten with the exception of wind.

Figure-5: Top ten countries % share in respective renewable sources – IRENA 2019.

Rational of scenarios rather than forecasting

Since future is always difficult to predict especially with many known and unknown factors. Generally, most of them difficult to predict due to element of uncertainty. Therefore, international agencies, such as International Energy Agency (IEA), BP, and others generally prefer to develop a number of scenarios based on different stories of assumptions. For example, regional GDP and population growth, pace of technological advancements in energy & and other sectors, structural changes in auto-industry, the impact of strict environmental regulations. Such as, Paris accord on climate change and many other factors including public outcry as well as perceptions of individuals. The Paris accord and public awareness forces, most polluted countries to devise policies and invest in renewable to cut pollution.  

Primary Energy Mix - Outlook

The role of fossil fuels will decline in the next 22 years from 84.7% in 2018 to average of 70.7% in 2040, but remain the dominant source of primary energy (Table-1). Though it varies from agency to agency and for different scenarios. From high of 76% Exxon to low of 56% BP-RT (rapid-transition) while EIA 68.2%. IEA energy mix under different policy scenario vary from low of 60% sustainable development (SD) and high of 80.8% current policies (CP) scenarios in 2040.

Oil share in global energy mix declined from 33.6% in 2018 to average of all scenarios to 26.8% in 2040. However, Exxon scenario assumes role of oil remains the dominant source of primary energy by 2040 and only marginally declining to 30%[i]. While in BP-RT and IEA-SD scenario, it will decline to 23%. My assessment is that it could shrink from 33.6% in 2018 to around 26% in 2040 or even less. Oil demand is expected to decline to about 75 mmbd in 2040 compared to 99.8 mmbd in 2018. The major decline is associated with road transport sector due to penetration of EVs, increasing ICEs efficiency and preference of using autonomous, uber rather than owning. As such, global oil demand declines somewhere between 75 – 86 mmbd by 2040, depending on speed of EVs penetrations.

The demand for natural gas is expected to increase in petrochemical, power, industries, transport and residential sectors due to its availability and environmental advantage. Moreover, natural gas has the ability to address greenhouse gas emissions and to displace coal in power generation. Gas is also utilized as a backup for intermittent renewables making it an essential resource for more wind and solar development. There have been major gas discoveries in developing countries in Africa and North Africa. Soon it will play an important contribution in domestic sectors of these regions. The role of natural gas expected to increase as more gas is available both in the form of pipe gas and LNG. Surprisingly, most of the underlying scenarios assumes that it will only marginally increase to 26%. According to IEA monthly electricity statistics, natural gas continued to be the leading source of electricity in the OECD, overtaking coal for the first time in 2018. In 2019, electricity produced from natural gas increased by 4.8% and was responsible for 29.0% of the total electricity production. My assessment is that its share will increase to 28% in 2040, as more gas supplies are available in the form of pipe and LNG and more gas discoveries are made in other parts of the world.  

Coal after governing the world over many centuries remains second most important source of primary energy - 27.2% in 2018. Environmental considerations, Paris climate accord, availability of substitutes (natural gas & renewable) its role is expected to plunge considerably by 2040. Its share in all given scenarios declined from 27.2% in 2018 to 20% in 2040. Though there is variation, low of 7% (BP-RT) and high of 25.4% under IEA-CP scenario. Though average of all scenarios is 18.3% in 2040, it will help in meeting agreed Paris climate targets. The major reduction is expected in power generation particularly in China and India – facilitating in mitigating coal-based emission. In 2019, coal-fired generation continued decreasing in most of OECD countries, with a total decrease of 361.4 TWh or 13.4% reducing its share to 22.1% of total electricity mix.  This decrease in coal production was the largest ever recorded, both in absolute and relative terms. The important decrease in OECD Europe highlights European efforts to phase out coal in the electricity mix. Many countries have established strategies to remove coal from their electricity mix by 2030. For example, Germany, the largest coal consumer in Europe, plans to be coal-free by 2038. These strategies include coal-to-natural gas fuel switching. Furthermore, new coal-fired power plant capacity receiving final investment decisions (FIDs) declined by 30% to 22 GW, the lowest level this century. The way renewable capacity in China, India and other parts of the world is exponentially growing it is quite possible the role of coal in primary energy shrink to 18%.

Study by “Statista” predicted that the global share of coal in electricity generation will decline from 35% in 2018 to 23.2% in 2040 while the share of renewable up from 28.2% in 2018 to 45.6% in 2040. This seems to be encouraging assessment and may complement average of all scenarios.   

Table-1: Summary of total primary energy mix scenario[i]

Analyzing the historical growth in renewable and natural gas, one can conjecture that this paradigm shift would be biased and in favor of environment friendly natural gas and renewables. An advantage of renewables is that there is 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. In the past the only constraint was cost of renewable that requires government subsidies. However, due to technological advancements and significant cost reduction these constraints are more or less manageable and have become quite competitive.

Interestingly enough, there is quite of variation in the scenarios of various agencies but all assume that renewable is the future for power generation as it helps in mitigating coal-based emission. The average share of all agencies scenarios is 23.7% by 2040. The lowest contribution of renewable is associated with IEA-current policies where it only grows to 14.7% while BP-RT comes up with 38%. My assessment after analyzing the historical data and its advantages is that its share could increase to well over 23% by 2040.

The growth in nuclear is pretty straight forward though there is variation. Its average of all scenarios stood at 5.9% with low of 4.3% Statista and high of 9.5% IEA-SD. 

i] BP Statistical review of world energy June – 2019.

[ii] IRENA total renewables include – hydropower (including mixed plants, pure pumped storage), marine energy, wind energy (on and offshore), solar (solar photovoltaic (PV), concentrated solar power (CSP), Bioenergy ( solid fuels and renewable waste), Biogas (renewable municipal waste, and other solid biofuels), Liquid biofuels (Biogas), and Geothermal energy. We have only used hydro power, wind and solar energy as these accounts for 76% of total renewable energy. For details see IRENA – 2020 report.

iii] Oil companies may not come up with a scenario for public use where oil share decline substantially by 2040. It could severely affect share value. Though they might be developing alternative strategies as to how to deal with lower future oil demands.

III) Since most of these scenarios are based on last year (IEA 2018), I am pretty sure the new scenarios further tilted in favor of natural gas and renewable due to significant growth in renewable and less FIDs for coal-based power plants.

OPEC Strategic Blunder – Oil Industry is on Ventilators!

By Dr. Salman Ghouri 

OPEC’s strategy in the past has been to maneuver its oil production to bring about market stability. However, the penetration of U.S. shale oil forced them to alter their strategy in favor of market share even at the cost of lower oil prices. Recently, Russia decided not to collaborate with OPEC in cutting oil production. OPEC’s traditional strategy is cutting oil production, but the Saudis decided to utilize their excess capacity to enhance oil production. In this way, Saudis wanted to destabilize the oil market targeting the booming US shale oil industry. The sensitive market reacted immediately resulting in the collapse of WTI to around $31.13/bbl on March 9 from a high of $47.18/bbl on March 3, though prices further dipped to 22.84/bbl by March 18, 2020. The oil prices have fallen further due to COVID-19 which is currently gripping the whole world - weakening global oil demand – causing excessive surplus. One should not forget that a similar strategy was adopted by OPEC in 2014/16, but it was unsuccessful.  At the end of Dec 2019, US shale oil production reached 9.12 mmbd even though the average WTI was hovering in the fifties as compared to 5.11 mmbd in Sept 2016.

Methodology and data

Since the objective of OPEC seems to destabilize the US shale oil industry by means of weaker oil price strategy, we decided to check the sensitivities of US regional shale oil producers. In an effort to explore the possible implications on US shale oil we have used the econometric model and used different possible oil price paths. Three scenarios are used. Firstly, what if oil prices are allowed to gradually increase to Dec 2022 reaching $56/bbl? (Reference case) Second, what if oil prices remain weak over the forecast period below $39/bbl? (Low case) Finally, what if oil prices are allowed to increase reaching $74/bbl by Dec 2022 (High Case)? The objective is to check the possible threshold at which US shale oil production survives/perishes.

We have used monthly data for U.S.’s seven shale regions (Anadarko, Appalachia, Bakken, Eagle Ford, Haynesville, Permian, and Niobrara) from January 2007 to Dec 2019. Figure-1 illustrates the oil price actual average monthly West Texas Intermediary (WTI) data (January 2007 to Feb 2020). Figure-2 depicts WTI forecast prices until December 2022 under alternative scenarios. The oil production for each regain is run against monthly average WTI prices from January 2007 to January 2020.

The historical data reveals that there is lag structure involved with changes in oil prices. When oil prices decreased/increased, the production did not decrease/increase instantly—rather it took a number of months. The timings of response varied from region to regions but generally six to eight months before the full impact is realized. We have run several polynomial distribution lag models (Almon) with various lag structures and (Koyack) model. Each regression is run with and without constants and also used an autoregressive/moving average scheme to correct autocorrelation problems if required. The best estimated model for each region was selected and then re-run to forecast respective regions’ shale oil production under alternative price scenarios.

Shale oil production forecast alternative price scenarios

Figures-2 to 9 depict US regions shale oil production forecast under alternative oil price scenarios. Based on our best estimated models U.S. shale oil production is expected to decline in all the regions in response to plunging oil prices. Generally, US shale oil production revives in almost all the regions once oil price reaches $49-50/bbl range, although Appalachia production only revives when oil prices hit $59/bbl.

When oil prices are allowed to increase, US shale oil production under the reference case is expected to increase after a lag of eight to ten months.  However, response varied from regions to regions. For example, Anadarko, Bakken, Eagle Ford bottomed in November 2020. Permian bottomed in October 2020 while Niobrora bottomed in May 2021. All the regions failed to recover their respective Dec 2019 production levels.  

Summary of Forecast

Table-1 illustrates the summary of US shale oil production forecasts under alternative oil price scenarios. Under the low oil price scenario production declined in all the regions and revived with the gradual increase in oil prices, yet failed to regain their respective Dec 2019 production level. In this scenario oil prices are assumed to remain between $20 and $39/bbl. This strategy could hurt US shale oil production as by Dec 2022 shale production decreased by 1.72 mmbd compared to Dec 2019. Higher oil prices assumed a price range of $20 to maximum of $74/bbl and continues moving upward. Generally, all the regions under high oil price scenario surpass their Dec 2019 production level. Anadarko, and surprisingly the US’s most prolific Permian region, failed to regain Dec 2019 level of production. US total shale oil production increase to 9.56 mmbd in Dec 2022 under high oil price regime compared to 9.12 mmbd in Dec 2019.  

Table-1: Summary of US Regions Shale Oil Production Forecast – alternative oil prices scenarios

Note: the numbers may not round.

Implications on oil industry

No doubt, this strategy will affect US shale oil producers provided OPEC is prepared to maintain lower oil prices within $20 - $39/bb or even in the range of $20 - $54/bbl (Reference) till Dec 2022. If oil prices were allowed to surpass fifty dollars, US shale industry generally would revive successfully. Unlike in the past, this time the US government prepared to shoulder the shale oil industry. In fact, the US government already decided to buy 77 million barrels for strategic petroleum reserves (SPR), a move to insulate US shale oil producers from possible bankruptcies. Therefore, the fallout of continuing to pursue this strategy will be more harmful to OPEC and other oil exporting countries than US shale industry.

Why this Strategy Short Lived?

Saudis are not only losing oil revenues due to lower oil prices but also due to lavish discounts to capture market share.  In addition, to avoid the wide spread of COVID-19 the government has put a ban on Umrah (pilgrimage). It is adversely affecting the hotel/tourism industry. The fallout is quite substantial as economic activities have stagnated. Millions of pilgrims who used to spend millions of dollars every day on goods and services during their stay is lost. Additionally, Saudi government requires a price tag of over $80/bbl to balance its budget has no option but to withdraw huge resources from sovereign funds to keep their economy afloat. The question is how long? Saudis have this liberty but it will have devastating impact on other fellow OPEC members and non-OPEC oil exporters. Most do not have enough resources in sovereign funds and with lower oil prices will have difficulty meeting budgetary requirements. To deal with the COVID-19 pandemic requires enormous resources. How they will survive?  

The analysis concluded that U.S. shale oil industry is insensitive to changes in oil prices in the short-term, but strengthen/weaken in the longer term with the increase/decrease in oil prices. When oil prices increase, shale oil production increases but when it declines it takes number of lags before its impact is fully realized. Under the high case scenario all the regions except Anadarko and Permian generally recover the lost share in production and also surpasses their respective production level of Dec 2019. However, under a persistent lower oil price regime the U.S. shale oil industry loses 23.4% percent of their production as compared to Dec 2019. The question remains whether OPEC will pursue this strategy over a longer term? I doubt that Saudis and OPEC can pursue such a strategy any longer because the oil industry needs trillions of dollars of investment in sustaining and enhancing future oil production. If such strategy continues, it means choking out the much-needed oil industry ventilation and may permanently damage the oil industry. I strongly believe very soon that this strategy will be reversed and market will find its natural way based on demand/supply fundamentals, allowing the oil industry much needed oxygen. Yet this strategy is beneficial for the oil importing countries to deal with COVID-19 and overcome its aftershocks.  

One thing is for sure that current oil price regime provided an opportunity to oil industry (particularly OPEC members) to prepared themselves to live in an environment of oil price between $30-$50/bbl or maybe less! One should not ignore the speedy penetration of electric vehicles (EVs) and its possible fallout on global oil demand that could possibly displaced 38 mmbd by 2040. It is good time to develop strategies to diversify their oil-based economies rather than spending time in market interventions.

OPEC Strategy – May help aftershocks of COVID-19

In a tug of war, Russia decided not to collaborate this time with OPEC in cutting oil production. Consequently, OPEC contrary to their traditional weapon of cutting oil production, Saudis decided to utilize their excess capacity to enhance oil production. In this way Saudis wanted to destabilize the oil market targeting the booming US shale oil industry. The sensitive market reacted immediately resulting in collapse of WTI to around $31.13/bbl on March 9 from a high of $47.18/bbl on March 3, though prices further dip to 22.84/bbl by March 18, 2020.

Wrong Market Assessment & Wrong Timings

OPEC like others failed to correctly assess the implications of COVID-19 on global oil market, which is alarming and spreading rapidly across the world. This pandemic is already affecting the global oil demand as people are scared to travel and unnecessarily leave their homes. Schools are closed and a number of companies are asking their employees to work remotely from home -- very thin traffic even during peak hours. In Italy, all restaurants and shops are closed with the exception of pharmacies and supermarkets. A number of European countries are complete to partial lock-down. While other countries also weighing such an option of complete lockdown in an effort to restrict wide spread of COVID-19. Like so many countries that already have stopped their airlines flying to most of the affected countries, US President Trump on March 11, 2020, put a 30 days travel ban from European countries. This news further reduced oil prices and oil demand. If such a situation persists for an extended period of time then surely one could see a large number of bankruptcies in aviation and oil industry as well as collapse of the global economy.

Have we Learned Lessons from History? 

A similar strategy was adopted by OPEC in 2014/15, after the collapse of oil prices, but it was unsuccessful (Figure-1). In response to decline in oil prices, the US shale oil production down from peak of 5.95 mmbd in March 2015 to 5.11 mmbd in September 2016, a lag of 8-10 months or in some basins even more lags are involved. However, once oil prices increase to fifty, US shale oil production increased (for more statistical analysis please read “Will OPEC Use This Strategy To Defeat U.S. Shale?”).  At the end of Feb 2020, US shale oil production reached 9.16 mmbd despite average WTI was hovering in fifties.

No doubt, this strategy will affect all OPEC and non-OPEC oil producers but the intensity would be quite different. In contrast, US shale oil producer’s survival depends on how long such strategy Saudis prolonged and US government supports.  Unlike in the past, this time US government prepared to shoulder the shale oil industry. In fact, US government already decided to buy 77 million barrels for strategic petroleum reserves (SPR), a move to insulate US shale oil producers from possible bankruptcies. U.S. government will do the needful to ensure that shale oil industry remain successful and continue to play important role in US economy. Because of shale industry US was able to reduce its oil import dependency from over 60% to below 25%. My assessment is that one call from US president will reversed their decision and oil prices will bounced back to over $35/bbl instantly irrespective of surplus.

Self-inflicting Damage

Saudis are not only losing oil revenues due to lower oil prices but also due to lavish discounts to capture market share.  In addition, to avoid wide spread of COVID-19 the government put a ban on Umrah (pilgrimage). Consequently, it adversely affecting their hotel/tourism industry and economic activities as millions of people who spend million on goods and services during their stay is lost. The government that requires a price tag of over $80/bbl to balance its budget has no options to withdraw huge resources from sovereign funds to keep their economy afloat. Saudis have this liberty but it would have devastating impact on other fellow OPEC members and non-OPEC oil producers. 

Figure-1: US Shale oil production in comparison to WTI

Unpopular Strategy - Blessings

Quite unaware of such action by Saudis, it turned out to be blessing for the global economy and surely provided some breathing space to recover from the aftershocks of COVID-19. Savings out of reduced oil import bill would be spent to fight against the COVID-19 that requires enormous resources anyway. Sometimes, unusual out of box decisions turn out to be blessings - thanks to Saudis for timely gift to mankind. 

* Dr. Salman Ghouri is an independent energy consultant.

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.

(Click to enlarge)
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