Oil and Gas Investor At Closing: Back to Square One

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Don’t doubt it for a minute: Our fate ultimately comes down to the same old thing—global oil demand. There are so many well-intentioned analyses, bold projections, passionate debates or ugly protests against fossil fuels, emissions, global warming, politics, returns, whatever, floating around, but the industry’s fate still comes down to what level of oil demand there is now, and what it will be in the future. Steady as she goes, declining slightly, rising slightly?

U.S. producers will be essential workers so long as there is sufficient oil demand. The question is, how will these producers meet that need in light of declining fields, net-zero goals, pipeline opposition and capital availability challenges? Which producers will do it?

In recent days, events show that as always, just as since its formation in 1960, headlines about OPEC deliberations can whipsaw oil prices and equities. Nothing new there. At press time, the United Arab Emirates and Saudi Arabia reached a compromise on quotas for the UAE, and the latter then said it will support extending the current OPEC+ supply agreement from April 2022 through to December 2022. This is good news, unless more oil coming to market skews the price again.

Market balances also depend on how many barrels of U.S. shale are winding their way through the pipeline at any given time. So far, American producers are drilling at a cautious pace to keep their production flat, or to increase it minimally. That sets up the likelihood of higher oil prices down the pike. With oil already around $74/bbl, plenty of analysts find it easy to call for $80/bbl by year-end, and a few say $100 could be reached.

We learned a lot about demand dynamics this past year, and we were reminded that it is elastic. The drastic fall in demand during the pandemic showed how much of an extreme economic or lifestyle change we would need to make to reach the much-touted and unrealistic net zero goal of the Paris Accord. For after all was said and done, experts such as the just-released BP Statistical Review of Energy say that global oil demand only fell about 9%.

Anti-fossil fuel people, take note! A transition away from oil is not going to be easy, and it will take decades. Heated rhetoric is fine; estimates and projections are speculative at best. Actual results that are feasible, scalable and economic do not necessarily follow.

Then again, the Fourth of July weekend reminded us just how much oil consumption can climb and how quickly, with more land, sea and air travel occurring as the economy gets back to normal and people open their wallets. Transportation is a key factor to watch.

We know that the pandemic drastically changed both consumer and commercial transportation trends, “… but global oil demand will probably continue to grow through 2030,” according to a new study by the Columbia University Center on Global Energy Policy and the University of California, Davis Institute of Transportation Studies.

Forty-four leading energy and transportation experts were involved, including well-known folks such as Marianne Kah, formerly the chief economist for Conoco for 25 years; and Mark Finley, a Rice University fellow in energy and global oil at the Baker Institute for Public Policy, and former economist for BP’s annual energy look-back. The group sought to understand how COVID-19 and other political, economic, social and technological drivers may impact transportation activity and thus, the global demand for oil.

They developed four scenarios featuring “varying speeds of economic recovery, levels of government intervention in energy markets and endurance of mobility trends that started during pandemic lockdowns.”

Here’s what jumps out to me: “In three of the four scenarios, global oil demand continued to grow through 2030.” (Italics mine.)

“Only under the final scenario—in which the pandemic’s disruptive impact to the global economy and mobility combined with strong government intervention to accelerate alternative—did oil demand decline after 2025.”

If demand, then supply? In July, Rystad Energy released some information of its own. It said about 1,300 billion barrels of oil are sufficiently profitable, and technically recoverable, to be produced before the year 2100 at a Brent real oil price of $50/bbl.

“In this scenario, global production of oil and natural gas liquids will fall below 50 million barrels per day by 2050. Exploring, developing, processing and consuming this amount of commercially extractable oil will lead to gross greenhouse-gas emissions of less than 450 gigatonnes of CO₂ from now until 2100.

“This is compliant with IPCC’s carbon budget for global warming limited to 1.8 C by 2100,” says Rystad Energy’s head of analysis, Per Magnus Nysveen.

This is good news for your strategy planning. The industry is “safe” for at least 70 years. There is plenty of oil to be recovered. Consumers will still need it and rely on it unless something else comes along.