Possible Evolution of the Oil Industry – 12/2/16

Companies in the oil industry are weighing their options as pessimism about traditional business models grows.

In the short-term, the collapse of crude oil prices has led to massive cuts in exploration budgets needed to find new fields. Some believe prices could rise one more time because investment in finding new supplies is so weak, but many firms like Goldman Sachs and Wood Mackenzie expect prices to stay between $50 and $60 a barrel — a level where few fields are profitable — in the short-term.

The U.S. Energy Information Administration (EIA) projects that a recovery in non-OPEC production, primarily from U.S. shale drillers in mid- to late-2017, will offset OPEC actions and limit price increases throughout the year.

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At low prices producers invest in the lowest cost per barrel sources like the Middle East, America’s Permian basin, Brazil’s pre-salt fields, and not much else. But even a boom for those areas could be short-lived if demand continues to decline in the long-term due to stricter fuel efficiency standards or widespread adoption of electric cars.

Concerns about reaching peak oil demand in the near future are rising as well. The IEA has projected that European consumption will fall from 11.7 million b/d to 10.8 million b/d between 2015 and 2020. Most, if not all, major oil players are prepping for the shift in demand. Shell finance chief Simon Henry has said the company sees oil demand peaking in 5 to 15 years. In China, China National Petroleum Corp. issued a report over the summer predicting oil consumption will begin to fall by 2030, if not sooner.

Others, though doubting peak demand will come quickly, are still preparing for it.

European oil companies are already shifting investment to sectors like petrochemicals or clean power that have better growth prospects. French oil supermajor Total SA has said it wants 20% of its portfolio to consist of low-carbon businesses before 2040.

Saudi Arabia, the world’s largest exporter of oil, is diversifying away from oil by investing in petrochemical plants and publicly listing state oil company Aramco, to raise money for other industries.

Meanwhile, Exxon and others are pouring money into natural gas as Chinese energy giants are aggressively embracing natural gas as a fuel for power generation and transportation.

For the companies supporting the oil industry there will be plenty of work decommissioning aging and unprofitable rigs at first. Next would come projects like Statoil, the Norwegian state oil company, and its floating wind farm where they could leverage experience with offshore oil rigs. Statoil also operates two carbon capture and storage (CCS) projects, technology which many fossil fuel companies support as a solution to emissions.

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