Energy Insights · 1st of November, 2016 · 1 minute ·

The Stone Age didn’t end because of a shortage of stone

Some industry veterans, used to the regular six-to-eight year cycles of boom and bust, have settled for riding out the storm by doing what they’ve always done: sitting tight, cutting staff and placing the onus for effective business change on the supply chain. In this way it is hoped that external forces will bring supply and demand back in line, the oil price will rise and normal service will ultimately be resumed.

But this downturn is different from anything previous. The characteristics of the oil and gas industry have changed dramatically since the last commodity price fall in 2008/9, particularly with the growth explosion in US shale. And parallel to that growth has been the increasing influence and commercial viability of renewable sources. These two elements – shale and alternative sources – will have the greatest impact on oil price in the future.

The US shale industry has changed the game for oil. Acutely tuned to respond rapidly to fluctuations in price, this sector has proven its ability to survive, adapt and even prosper in the toughest economic conditions. The price decline arrest and tentative rise in the past few weeks – triggered by suggestions of an OPEC-led production cut – have instigated an increase in the US rig count, and reports that every US shale field is showing an increase in efficiency per rig by as much as 27 barrels per day. [1]

With US shale adopting the role of swing producer, a position previously held by Saudi Arabia, it is this sector that will have the greatest influence on oil supply levels, and therefore commodity price, from now on.

But the oil industry no longer has things all its own way. It is facing an ever-increasing challenge to its energy supremacy from alternative sources, and if it is to remain competitive to consumers in future it cannot allow commodity prices to return to unsustainable levels.

Instead of our demand for energy being constrained by the historic limitations of oil and gas supply, we are entering an age of energy abundance where consumers will be able to make far greater choices than ever before for their energy, and oil will have to fight hard to keep its market share.

While in the short term, there may be a return to the supply and demand equilibrium, and some experts have suggested a correction in the oversupply in the second half of 2017, in the long term it will be the level of demand, rather than supply, that will shape the future of the global oil and gas industry.

Royal Dutch Shell’s chief financial officer, Simon Henry, was reported on 3 November as saying: “We’ve long been of the opinion that demand will peak before supply. And that peak may be somewhere between five and 15 years hence, and it will be driven by efficiency and substitution.” [2]

Or, as one highly respected professor said to me last week: “The stone age didn’t end because of a shortage of stone.” It ended because demand for stone peaked before supply, and that’s because a viable alternative was identified and developed – bronze.

Leading industry publication Recharge recently stated that since the end of last year clean energy projects had received more than US$310bn in investment – two-and-a-half times that spent on oil and gas exploration and production. [3]

“The Petroleum Age, an era of drill and pump, wildcats and dusters, of exploiting a multi-million-year-old finite resource, is running dry – and the Renewable Age is crackling into supercharged, high-voltage life,” it announced.

The latest supporter of this theory appears to be DONG Energy. Just a few days ago, it was reported that the Danish operator was considering selling its oil and gas business to focus instead on wind farms.

The development of extra long-life batteries for the storage of renewable energy is one technological advance that will significantly reduce costs and enhance commercialisation of such sources while increasing the competitive pressures on oil. Renewables are in the process of cresting the steep hill of technical difficulty and commercial viability and, with their pro-environment message, may become an increasingly attractive proposition for householders who will be able to choose not only their energy provider but also the type of energy they want to use.

In this future, oil will have to revise its commercial models, meaning that we may have to settle for a modest commodity price forever. Any large increases may trigger an increase in shale activity, creating a supply overload and a price fall again. On the other hand, if oil becomes too expensive, people may simply have the option to choose an alternative source to power their homes or vehicles.

So the way the oil and gas industry responds to the current situation will be critical to its future longevity. Will future historians label this price downturn as the point when renewable energy started to overtake oil, just as the Bronze Age overtook the Stone Age all those years ago?

[1] US shale flows to continue decline 17 October 2016

Energy Insights · 1st of November, 2016 · 1 minute ·