Disclosures from 23rd World Energy Congress: THE TOMORROW OF OIL AND GAS

This might seem like yesterday’s news. Everyone knows how important oil and gas are for the development of industry, economy and so forth. This subject has been debated many times before and another meeting doesn’t really have the potential of changing much, right? Every year the same people come together and discuss the same old ideas. A waste of time and nothing gets better? Surely things have taken a turn for the worse. The industry is in disarray and most likely the price of oil isn’t rising any time soon. It may be all for naught, but what if it isn’t? Nations are no longer isolated islands. Globalism is happening right now, even if we like it or not. The people who suppose that these meetings are not attaining anything palpable may be reminded that what is most important in the world of today is communication. The solution is not going to simply fall in our laps. We have to work together towards it. Even if this Congress is just a small pebble it may produce big enough ripples that could change the face of the industry as we know it.

Of course, we are talking about the 23rd World Energy Congress which took place in Istanbul between 9 and 13 October. The general consensus was that this is a turning point. Something has to give in order for the game to change. It seems that the game changer will be supplied by the way the world turns. In other words, the oil and gas industry will be shaped by higher forces in the coming years and these are geopolitics and technology. Nothing will literally move without the helping hand provided by technological advances and an agreement reached while consulting the world map. One of the best examples was provided by Gertjan Lankhorst, the GasTerra CEO, who highlighted how fast the dynamic can change in the world of oil and gas. Recently the so called golden age of gas has come to an abrupt end and this only started because of the Russian-Ukrainian conflict. Challenges and opportunities are still lying ahead of us. We just have to make the best of them.

But before we start reviewing what was discussed at the conference we should first take a look at the statement that the World Energy Council issued beforehand, as it raised some interesting topics of discussion. Their ‘New Frontiers for Energy’ started with the definite claim that this is a time of transition. As they have put it, this transition is the consequence of fast emerging technologies, the digital revolution, environmental challenges and diversity of demographic patterns. The good news is that this transformation is happening because of us, not in spite of us, so we most definitely have a part to play. The bad news would be that not everyone will be left standing after the dust settles. Adapt or perish seems to be the motto of the new age. In order for us to better understand the process they have carved out seven ‘new realities’ that we will have to face.
It seems that the biggest transition will actually take place exactly on the market. The days of peak oil are now coming to a close. According to the statement, by 2030 the demand for energy will peak. And it’s all downhill from there. In order to stay competitive, energy companies will have to achieve their growth expectations and this will only be attained with a smart investments plan.

Secondly, even with our newfound conviction that we need to make it green, we are not progressing fast enough. Global warming is still a very real problem and in order to catch up to the budget plans, the process of decarbonisation will have to be accelerated. It will be no easy feat, as even the most optimistic analysis reveals that we will surpass this budget by 2045. Definitely the deciding factor in this affair will be the transition of global transport to low carbon solutions. We have the plans; we just need the policies to enforce them.

Resources will still play a major role, as new primary sources are emerging on the market, mostly in the areas of oil and coal. Fossil fuels will continue to play a major part in the energy mix, with coal estimated at only 5%.

THE GOLDEN AGE OF GAS WILL CONTINUE AS THE RESOURCE IS THE ONLY FOSSIL FUEL WITH SUBSTANTIAL GROWTH PROSPECTS

According to predictions, the role of natural gas in production of energy will shift from volume to system service and new technology is poised to discover new storage opportunities and a method of converting surplus renewable energy into gas. This will help to keep the European market at a competitive level.

The discussion will change from stranded assets to stranded resources by 2060, and this will have to be incorporated in the big picture, along with a carbon and climate dialogue.

It seems that in coming years the energy sector will have to face even more challenges as an increase in extreme weather events, the pressure on using water in energy production and cyber terrorism will contribute to a new environment for the industry. A new ‘soft resilience’ approach will have to be implemented. Systems will not only have to be stronger, but safer. New tools and practices will be required if we are to adapt to the new playing field.

As far as innovation goes, we are on the right track, all thanks to consumer needs. A rapid growth in solar and wind power is envisioned, along with the electrification of energy use. To keep up with the trend, the industry will require massive investments in fields like research, development and demonstration. A coordinated innovation initiative will go a long way towards giving credit to the decarbonisation plans.

Speaking of transition, we will have new leaders as well. The focus has shifted from OECD countries, with nations like China, India and Africa deciding the energy agenda of the future. As globalization fully spreads, we will have to adopt a policy of inclusion if we are to realize the energy transformation.

That being said, the situation is far from ideal. The UN has acknowledged energy as a development goal prompted by the staggering reality that 1.1 billion people still do not have access to energy. South Asia and Sub-Saharan Africa will prove to be hubs for the development of alternative and innovative power solutions. In order to keeps things equal and attract investors, a stern policy and clear cut institutional frameworks will be required.

This may sound good and all but in a couple of years it may be proved that it wasn’t anything else than wishful thinking. With these guidelines in mind let us see if the subjects discussed at the conference really measure up.

KEEP YOUR EYES ON THE PRIZE (SUPPLY AND DEMAND), NOT ON THE PRICE

Regarding the peak oil versus peak demand, the general consensus was that this will be a balancing act. According to Minister of Energy, Industry and Mines, Khalid al-Falih of Saudi Arabia, the major challenge right now for oil producing nations is keeping supply and demand at a manageable level. Despite his country’s commitment to hydrocarbons, the Minister advised that the world needs to remain open to investing in all energy resources. He admitted that the road ahead is still bumpy and requires an ambitious albeit pragmatic approach. It is a known fact that this transition will not go smoothly, with multiple setbacks already rearing their heads on the horizon line. Reinforcing its role as the world’s leading spare capacity holder, Saudi Arabia will step up investment in unconventional oil and gas with a target of 18 bcf by 2020. Consenting to the Paris Agreement, Saudi Arabia is also aiming towards 10 GW in power generating capacity from renewable resources, such as solar and wind power, by 2021. On the matter of resources, the Minister added that he does not believe Saudi Arabia will ever have stranded oil reserves. It seems that the Kingdom will be ready to handle whichever price emerges as the nation’s crude production reached a record of 10.67 million barrels of oil per day in August. With proven reserves of 266.6 billion barrels, the nation seems prepared for the challenging future ahead.

Meanwhile, OPEC and the other big crude oil producers are still working towards a deal for capping production, but the industry executives are faced with another challenge: the sharp drop in investment could lead to a supply shortage. This concern is related to the cancellation and delay of over USD 1 trillion worth of oil projects after companies cut budgets due to the drop in oil prices. This could be a decision that will drastically affect the future, seeing as only the development stage of an oil field takes around four years.

This production ceiling of 32.5-33 million barrels per day and underlying motives were a major subject of debate at the 23rd World Energy Congress as OPEC is not the only influence on the market anymore. As shale, deepwater oil, tight oil and other procedures are making themselves known around the world, coming to an agreement within and without the organization will be more and more difficult.

The role of OPEC, that of coordinating decisions, was made clear again, with the organization that holds only a third of the global market supply aiming at having talks with other non-member oil producers in the hope of working out an international deal that will cap production for at least six months. A supporter of this initiative is Russia, the world’s largest producer. Speaking about Russia, another point strongly emphasized at this congress was the role of energy in promoting peace and normal living conditions for all citizens. All the leaders seemed to agree that solving the energy issue holds the key to solving all underlying issues especially in the Middle East region where 65% of global oil reserves and 45% of natural gas still lie.

ENERGY IS THE MEANS OF SPREADING PROSPERITY IN THE WORLD

President Vladimir Putin adhered to this notion, adding that the common goal is to provide all the people of the world with access to modern energy resources. His country’s collaboration with Recep Tayyip Erdogan’s Turkey was again touched on with talks about the TurkStream natural gas pipeline and building Turkey’s first nuclear power plant. Russia is indeed envisioned as a major player in rebalancing the market, as well as the other non-OPEC members.

Back to the matter at hand, in light of the fact that OPEC is cementing its role as a central oil distributer, Patrick Pouyanne, Total’s Chief Executive, prompted the industry to resume the investments process, warning that the world will face a lack of supplies by 2020. According to the International Energy Agency this shortage will hit the oil industry as soon as 2018. But the future is not so bleak. This year only, eight new oil and gas projects have been given the green light and they are envisioned to produce approximately 1 million of barrels, with a cost of a combined USD 22.1 billion and an average 38 months streamlining time. BP Chief Executive Bob Dudley stated that he expects supply and demand to remain relatively balanced come 2020, based on the emergence of such new fields and the surplus of US shale oil which has a rather short extraction time of only a couple of months.
Enter ‘volatility’, the new choice word when talking about prices and the market in general. The industry and prices, as argued by Pouyanne and Lorenzo Simonelli, President and CEO of GE Oil & Gas, are cyclical. This means that the natural decline could be stopped through smart investments when the prices are low. With all this talk about efficiencies, people are rather afraid to take risks anymore. According to Maarten Wetselaar, Shell Integrated Gas and New Energies Director, a possible strategy would be to bring down costs, thanks to technology. These breakthroughs in technology would eventually lead to shorter cycles as advocated by Simonelli. He also claimed that the hydrocarbons industry was three times less efficient than the light industrial sector. In order to ensure better productivity, product standardization, the reduction of unplanned downtime and a streamlined project management we should reduce inefficiencies. On the matter of prices, Bob Dudley added that he expects oil prices to vary between USD 55 and USD 70 a barrel until 2020 with shale oil in the US diminishing those prices.

Another interesting topic, linked to the rising of demand and transition to the low carbon economy, would be the expansion of the market for gas and LNG. Unconventional gas such as US shale and Australian coal-bed methane are dramatically transforming the global market. Even so, fierce competition is still provided by coal, oil and renewable, especially in Asian countries. But new energy hubs are expected to appear in the region, with new gas customers, a change which will bring about a new dynamic for the market. This will make LNG safer and even more competitive. Shigeru Muraki, Executive Adviser Tokyo Gas Company, also added that it was important to establish a supply chain in the next decades amidst the challenges brought by competition with hydrogen and over supply. David Hobbs, head of research for the King Abdullah Petroleum Studies and Research Centre, added that an improving and evolving market for gas could go hand in hand with the process of decarbonisation.

NATURAL GAS WILL BE THE MOST SUITABLE SUBSTITUTE FOR COAL

According to CEO of BP Bob Dudley, the power generation feedstock of the future will be gas, not coal. To prove this, he shed light on BP’s projects in Oman, Indonesia, Trinidad, Egypt and Azerbaijan. His predictions include that his company’s portfolio would comprise 60% gas projects by the end of the decade as the age of ‘big gas’ is rolling in. Renewable energy, as rapidly growing as it is, will not comprise more than 15% of the energy mix by 2025. He went on to emphasize the importance of learning how to do business differently, with standardization and safety as the keys to success. Another advocate of change was Amin Nasser, President and CEO of Saudi Aramco, who added that improvements will have to be transformational, not just incremental. He went on in giving a name to this new road map of navigating the transition: ‘Energy 2.0’. This plan outlines the necessity of new strategies, policies and investments without disregarding the risks. His three business components were based on continued investment in the supply of oil and gas, maintaining strong financial capacity and adequate investments in research and development. Mentioning Saudi Arabia’s Vision 23 he clarified that his company will continue to study opportunities in Turkey in order to diversify and sign MoUs with Turkish contractors.

As of now, the primary energy demand is 280 million barrels of oil equivalent, 80% of that amount being provided by fossil fuels. Taking the current trends into account and the specialists’ opinions, we can safely say that this is still pretty much the age of oil and gas. Whether or not by 2040 the demand will reach 360 million barrels a day, with 75% met by fossil fuels is still in the realm of speculation. The future of the oil and gas industry is a very uncertain one. But we can be sure of something. The sooner we start changing our ways, the better. We might not live to see how the future of the industry unfolds, but we can be part of building it.

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