John Wetton, CEO of the global oil and gas company Standard Club, recently wrote a blog post warning of the impact the likely coming decade of low global oil prices will have on the global energy industry.
The larger oil companies are clearly concerned about this and so are shifting their focus to all forms of energy with a particular focus on renewable energy, gas, and coal, with some decisions to not renew some fossil fuel capacity. One oil industry source tells me that the big oil companies want to “extinguish the coal business completely”.
Wetton lays out three different options the oil and gas industry can take, each with their own downsides and advantages. Wetton warns that OPEC, the fossil fuel industry, and biofuels industry will all suffer if all three tend to work together, but if they decide to work separately, then one of the alternative power sources (wind, solar, gas, or even nuclear) will emerge as the clear winner.
The downsides of the renewable energy side of this are fairly obvious. Under that regime, the winners will be the upstream oil and gas firms that won’t need to move with the development of the economy; this will also place downward pressure on the costs of the long-cycle extraction process that plays a vital role in the production of unconventional hydrocarbons such as shale oil and gas.
At the same time, some big European and US shale oil firms with exposure to domestic shale oil will be hit by a higher US dollar and lower oil prices and could find themselves unable to compete with the low costs in other parts of the world where the energy content of renewables falls well short of extraction costs. Dry bulk shipping, which relies heavily on US exports, could also be hit if the US opts to solely export LNG, but even under a two-way trade deal, US shale gas firms could still be shut out of foreign markets if the cost of LNG is set higher.
The advantages of Wetton’s plans are very clear. Conventional oil and gas firms will no longer have the massive supply curves that they built up over the past decades and this will reduce the cost of production and boost productivity to a great extent. Companies with a large international footprint, such as Shell, Total, and Statoil, which relied for their profits on a large global supply chain will be able to ride out the downturn.
The advantages of this shift away from traditional hydrocarbons also come with some downsides. The oil and gas companies might not be able to act in some places where it is their traditional markets that have been impacted. The oil and gas firms are not going to be able to offer import substitutions. This could mean greater US refining capacity, but we will only see more US gasoline production if many firms can’t export to other countries, and how much lower will crude oil costs go without the entire petrochemical chain and conversion industries are blunted? A “one size fits all” policy could lead to the total expropriation of all the petrol, diesel, and gas stations on earth, which will have serious repercussions for the bottom rungs of the global economy. The complete dismantling of the petrochemical industry could have an adverse impact on the world’s poorest nations, especially those in Africa and Asia, while also wiping out significant numbers of jobs globally in the power generation industry.
Even if the oil and gas industry decides to rejig the plan, and allow their traditional operations to continue, they can be forced to face up to the fact that the energy sector is a high value-added part of their business and will need to shift priorities. The oil and gas businesses will also be competing with very serious entities outside of oil and gas too, some of which may not have oil and gas origins but are interested in growing beyond their base of domestic markets. Clearly these kinds of plans cannot be implemented in a timely fashion, but they can serve as an important starting point.
John Wetton is correct to say that the oil and gas industry has to move. There is currently little understanding of the economics involved in electric cars and wind, solar, and batteries – who will afford them, who will build and operate the charging stations, who will charge them and where, and what do they do if the price of fossil fuels surges beyond their point of no return. All of these issues are to be worked out in due course, but for now it is essential that we get a handle on how the energy sector might change in the coming decades.