石油和天然气公司投资前景

As part of commitments under the agreement each country put forward their Intended Nationally Determined Contributions (INDCs), taking into account national priorities, circumstances and capabilities.  Analysis by the International Energy Agency (IEA) and others suggests that current INDCs will result in a warming of 2.7 – 3.0oC compared to pre-industrial levels.  This is some way short of the target of well below 2.0oC.  There is also a risk that these central predictions could be optimistic due to the uncertainties of climate forecasting.

A key conclusion is that we will need to act together to further tighten our INDCs to reach the goals of the Paris Agreement and companies need to bear this in mind when formulating investment strategies.  However this should also be within the context of ensuring energy security for all and energy access for those who are currently without modern forms of energy.  As IEA figures for 2017 point out, 993 million people were without electricity access and 2.7 billion lacked clean cooking, resulting in an estimated 2.6 million premature deaths per annum.

Investment in Oil Production

Annual oil demand growth is still 1.2-1.5 million barrels per day (mbpd) and subject to changes in global economic activity.  Looking through short term variations the consensus view is that this is likely to slow to 0.5mbpd before a peak or plateau sometime before 2040.  Depending on which scenario you choose, and how quickly INDCs are tightened, peak oil demand will be early or later; for a comparison see the Oxford Institute of Energy Studies (OIES) or IEA analysis.  A key conclusion of both works is that while demand may peak at an uncertain date this does not obviate the need for new investment.  This is because production declines more rapidly without investment than in any credible demand scenario, opening up a wedge of new supply needed to satisfy demand.  It now seems certain there are more oil resources in the world than capacity in the atmosphere to absorb emissions.  The question is which investments it is prudent to make, to turn resources into producible reserves.

When considering the investment outlook for the oil sector, the discussion often turns to speculation about the oil price.  The one thing we know about the oil price is that it is volatile and price predictions are usually wrong, although the demand outlook discussed above could suggest long term downward pressure.  What really matters to oil companies is the difference between cost of production and realised price.  According to analysis by Rystad Energy, between 2014 and 2018 the industry reduced costs dramatically with the breakeven for shale oil falling from Brent $95/bbl to $55/bbl, and for conventional oil from $60/bbl to below $40/bbl.  Similarly in 2018 the Federal Reserve Bank of Dallas surveyed shale producers and concluded that profitable new wells can be drilled at oil prices in the $60s/bbl; and indeed US shale production continues to grow.  There are signs of a modest investment recovery in 2019, but mostly companies are emphasising capital discipline, viability of projects at an oil price of $50/bbl or less, and shorter payback times.

On the one hand this has led to some commentary that there is potential for an oil supply shock and resulting price spike if supply were unable to keep pace with demand growth, with responsiveness and sustainability of US shale oil production a key variable.  Currently it is difficult to disentangle geopolitical risks of a supply shock from supply/demand fundamentals.  On the other hand, some have pointed out that in scenarios consistent with a temperature rise well below 2oC, increased investment will not be required.  A possible conclusion is that the oil and gas majors are being economically rational in managing their risk profile by maintaining investment discipline, and that a price spike, when it comes, is upside but could well be followed by a price bust.  Perhaps we should be more concerned about producing countries rather than the oil and gas majors?  With some exceptions they have a poor track record of economic reform and diversification with each upward price spike being taken as justifying further delay.

Gas Production and Marketing

Diversification from oil into gas is a strategy being pursued by many oil and gas majors, particularly in the Liquefied Natural Gas (LNG) market where the flexibility of LNG means customers can be supplied from a portfolio of sources.  This is driven by a view that the gas business has better growth prospects and potential longevity than oil; for example the BP Energy Outlook 2019 indicates that even in a Rapid Transition scenario, demand for gas grows out to 2040 while oil demand falls.  The IEA’s Sustainable Development scenario reaches similar conclusions.

The above is based on the correct analysis that emissions from gas are less than from oil and particularly coal; carbon emissions per kWhr from a Combined Cycle Gas Turbine (CCGT) are around half of those from coal fired plant along with better local air quality outcomes.  However, as pointed out in the Special Focus on Natural Gas in the IEA’s 2017 World Energy Outlook (WEO), the cost of power from a CCGT can be around double that from a coal fired plant unless you are in a low gas price region.  In the power sector it is clear that gas needs to be marketed on value in use (e.g. lower carbon and other emissions along with the greater flexibility that can offset the intermittency of renewables) and not on cost alone.  It is a similar story in the domestic, commercial and industrial sectors which in many countries is at least as important for gas demand as power; gas is valued for its flexibility, lower carbon emissions and cleanliness in use rather than on cost alone.  Countries that wish to encourage the use of gas need to design polices that favour the flexibility and relative cleanliness of gas rather than consumption subsidies, and companies need to respond with marketing strategies that emphasise value in use over direct fuel cost.

Downstream Challenges and Opportunities

An area that doesn’t receive as much attention is the need for an adaptive downstream sector.  Air quality issues linked to diesel engines have recently received a lot of attention, particularly in Europe, and are likely over time to effect the petrol/diesel mix.  Increased fuel efficiency and penetration of electric vehicles will reduce gross demand.  More immediately, from January 2020 the International Maritime Organisation will limit sulphur to 0.5% in marine fuel oil bunkers.  The international crude mix is also changing as more US light oil comes onto the market, along with declines from heavy oil sources such as Venezuela.  All of the above point to the need for an adaptable downstream refining sector and selective investment to maintain competiveness.  In downstream marketing the majors own trusted brands and sites in key locations, where they can deploy services such as charging of electric vehicles.  These are enduring competitive advantages.  

Petrochemicals are also integrated with the downstream sector, and growth is projected to be robust.  However more stringent regulation on single use plastics and greater recycling may mean that growth underperforms projections.  As with upstream oil investment discipline will be critical.

Energy Sector Diversification

Shell’s CEO at CERA Week 2019 said their ambition is to become a major electricity company and that integration with gas supply and energy trading skills are key competitive advantages.  Implementation will be key.

The oil and gas majors likely have competitive advantages in certain areas, e.g. Carbon Capture Usage and Storage (CCUS) and Biofuels where their process engineering skills are relevant.  For CCUS subsurface knowledge and ownership of assets for carbon disposal or enhanced oil recovery are also advantages.  In CCUS development I judge that a technical breakthrough is needed and that scaling existing amine absorption technology will not give us the cost reductions we seek.  

In addition to the above there are also a number of no regrets moves the majors could and are making to render their portfolios more resilient to climate change challenges.  Methane emissions are second to carbon dioxide as a driver of climate change.  Oil and gas production, transport and use are a significant contributor to anthropogenic emissions, though probably second behind agriculture and waste.   As part of the Oil and Gas Climate Initiative (OGCI) progressive industry leaders have started work but more action would be welcome.  The IEA have estimated that between 40-50% of Methane emissions from industry could be eliminated at no net cost, primarily because the captured Methane becomes a marketable product.  There is an open question about the extent to which technology in areas such as CCUS and Methane reduction should be public goods as opposed to propriety technology.

Finally, I want to mention the digital transformation which is occurring in many industrial sectors and increasingly in the energy sector.  Digital and Artificial Intelligence (AI) will have an important role in driving cost competitiveness and innovation in the industry.  In the power sector we are starting to see its influence in demand management and operation of smart or distributed grids.  To date most of the reported work in the oil and gas sector has been on important but incremental initiatives such as equipment condition monitoring, but there remains the possibility of breakthrough or disruptive applications. We should expect the unexpected and adopt policies and regulation that encourage innovation and competition while protecting the data of clients and intellectual property of investors.  We should trust in the market and resist the temptation to pick winners; 20 years ago who predicted recent breakthroughs in the cost of offshore wind, conventional silicon solar cells and shale oil and gas?

Design | Sun Ziyue