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Page added on March 15, 2017

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Big energy fears peak oil demand is looming

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In an attempt to improve the quality of Beijing’s polluted air, the authorities are planning to mandate that every new taxi in the city must be electric or gas-fuelled, China’s National Business Daily reported last month. Beijing’s taxi drivers are no fans of the electric cabs in use there since 2014, complaining about inadequate battery range, alarming performance dips in cold weather and insufficient charging stations. But the thought of the Chinese government taking concerted action to push road transport towards alternative fuels will send chills down the spine of every oil producer worldwide. The prospect of “peak demand” for oil — an end to growth in global consumption — has been discussed in the energy industry for many years, without apparently coming much closer.

But some of the world’s leading oil companies now see peak demand and sustained lower crude prices as a risk that they need to prepare for. Royal Dutch Shell has suggested the peak could come as early as the late-2020s. Statoil believes it could be between the mid-2020s and the late-2030s.

Not everyone agrees. The International Energy Agency, the watchdog backed by rich countries, thinks that unless there is much more intensive action by governments to tackle global warming, oil demand is likely to continue to grow out to 2040 and possibly beyond. John Watson, chief executive of Chevron, told the CERAWeek energy conference in Houston last week that some of the forecasts of impending peak demand were just wishful thinking. “Demand is likely to continue to grow for our product for some time,” he added.

Some big oil groups, however, regard the threat of peak demand as another pressure forcing them to become more efficient. Bernard Looney, BP’s head of exploration and production, argues that large oil companies face a new competitive landscape as a result of the US shale revolution, the falling costs of renewable energy, and governments’ efforts to combat climate change by curbing use of fossil fuels.
“There’s an abundance of hydrocarbons in the world . . . more hydrocarbons than the world needs, possibly,” he says. “I don’t know how those [factors shaping the future of energy] are going to play out . . . Nobody does. But I think it would be very unwise to ignore them.”

Through the past decade, as analysts and industry executives have discussed peak demand, global oil consumption has continued to rise, going from 84.5m barrels per day in 2006 to 96.6m b/d last year. Spencer Dale, BP’s chief economist, has said electric cars alone are unlikely to have a “game-changing” impact, with 100m on the road by 2035 cutting just 1.2m b/d from global consumption. Passenger cars, anyway, account for only about a fifth of consumption, and cost-effective alternatives are even harder to find for other uses of oil. Between 2015 and 2040, the IEA expects oil demand from passenger cars to drop slightly, while its uses as diesel for trucks, jet fuel and petrochemical feedstocks all grow strongly.
Forecasts of oil consumption, however, depend on the outlook for prices. The IEA projections are based on an expectation that oil prices could rebound to more than $100 per barrel in the 2020s. But Philip Verleger, a visiting professor at the Colorado School of Mines, suggests higher oil prices could drive many more consumers towards electric vehicles and alternative fuels including liquefied natural gas for trucks.
“It’s a double-edged sword,” he says. “If prices stay low, then the IEA has a reasonable chance of being right [about continued growth in oil consumption]. But an awful lot has to go right for that forecast to be fulfilled.” That is the Catch-22 for oil producers: their best hope for continued demand growth is if prices stay at levels that put their profit margins and cash flows under pressure. Some big oil groups are therefore trying to future-proof their operations against a world of peak demand and sustained lower prices.

Shell last week announced a $7.25bn sale of most of its assets in the oil sands of western Canada, which are one of the highest-cost sources of crude. Ben van Beurden, Shell’s chief executive, says that in cash terms its Canadian oil sands business is making money at current crude prices, but the scale of the investment that it has made in the Athabasca project means that its returns are relatively low. Other big oil groups are also reshaping their portfolios for a more competitive market. Chevron and ExxonMobil of the US are stepping up their investment in low-cost US shale, particularly in the Permian Basin of Texas and New Mexico. BP, meanwhile, is increasing its production of gas, which the company expects to be a faster-growing market than oil as countries such as India opt for it as a relatively clean energy source compared to coal. Some big oil groups, most notably Total, are making investments in renewable energy.

Above all, preparing for a world of peak oil demand means driving down production costs. In a commodity market with almost no product differentiation, the only way oil producers can compete is by having the lowest-cost crude. Eni of Italy says it has reduced the average break-even price of its new projects to just $30 per barrel. Eldar Saetre, chief executive of Statoil, said the company had cut the break-even price of its “next-generation portfolio” of new projects from about $70 to “well below $30”. Some of the cost-cutting comes from forcing down the prices charged by suppliers, but the large oil producers say the majority of their reductions in expenses stem from working smarter and more efficiently, using standardised components, and investing in technology including automation. “We have these unmanned [offshore oil platforms],” says Mr Saetre. “Unmanned, very slim, lean . . . You don’t need a helicopter deck. You don’t need living quarters.”

 
Patrick Pouyanné, chief executive of Total, said 65-70 per cent of the savings the company has made are structural. BP said for it, the figure is about 75 per cent. Those steep cost cuts are enabling the big oil groups to survive. Mr Pouyanné talks about being “optimistic” with crude at $55 per barrel — not much higher than this week’s price of about $51 — and plans to approve 10 new large projects over the next 18 months or so. If the IEA’s scenario of continued oil demand growth and higher prices in the 2020s is realised, those projects could turn out to be hugely profitable. The risk is that would accelerate electric car sales and more investment in alternative energy, and bring forward the point of peak demand.

European oil companies increase investment in renewables

European oil companies led by Total of France and Statoil of Norway have been increasing their investments in renewable energy to prepare for a possible future of flat or falling demand for crude. Eldar Saetre, chief executive of Statoil, says diversification into renewables makes sense. “We have a lot of skills which we can apply directly into offshore wind. I can deliver good returns, [with] a much lower cost of capital than oil and gas would require.” Investing in renewables can also be useful to polish up a tarnished image. Ben van Beurden, Royal Dutch Shell’s chief executive, warned that “trust [in oil companies] has been eroded to the point where it is an issue for our long-term future”. A Shell-led consortium last year won the contract to build a 700 megawatt offshore wind farm in the Netherlands. Total has in recent years been the leader among large western oil groups in investing in renewable energy, taking a controlling stake in listed solar power company SunPower and buying Saft, a battery manufacturer. Patrick Pouyanné, Total’s chief executive, said investing in renewables was a real business, not a charity, but was also “part of the way to make [the] oil and gas business acceptable”. He added oil and gas companies were “accused of being the villains” in the debate over climate change, and investing $500m out of potential cash flow of $22bn made sense to keep a foothold in fast-growing renewable energy technologies. “I have some shareholders who really are pushing us to do that,” said Mr Pouyanné. “The climate debate is there, it’s a fact.” However, he was also quick to put the investment in renewable energy into context. “It’s only 5 per cent of the strategy,” he said. “We are an oil and gas company.”

 

FT



11 Comments on "Big energy fears peak oil demand is looming"

  1. Cloggie on Wed, 15th Mar 2017 2:30 pm 

    Peak oil came and peak oil went and almost nobody noticed.

  2. GregT on Wed, 15th Mar 2017 2:54 pm 

    “Peak oil came and peak oil went and almost nobody noticed.”

    Yup, almost everybody is blaming the fallout on something, or somebody else. Almost nobody will continue to notice the effects of peak, cheap, conventional oil. They’ll be too busy fighting amongst one another, and desperately trying to figure out ways to generate other forms of energy in a futile attempt to keep modern industrial society from going under.

  3. GregT on Wed, 15th Mar 2017 3:04 pm 

    Some of the other common predictions on the ride down, were isolationism, protectionism, political extremism, and a growing number of failed states.

    Almost nobody seems to be noticing any of them either.

  4. BobInget on Wed, 15th Mar 2017 3:11 pm 

    Slow down this US centric attitude.

    To avoid Egypt’s collapse KSA has resumed crude oil shipments curtailed late last year. IMO, it’s doubtful Saudi can keep up this charity forever.

    google for details

  5. onlooker on Wed, 15th Mar 2017 3:48 pm 

    Oh and too add to the effects that Greg enumerated the more savvy observer would have noticed signalling PO dynamics commencing, would be WARS and a switch to unconventionals

  6. rockman on Wed, 15th Mar 2017 4:23 pm 

    looker – “PO dynamics”. Come on, buddy, you’re so close:

    POD,POD,POD,POD,POD,POD,LOL.

  7. Boat on Wed, 15th Mar 2017 5:13 pm 

    That top chart is full o shyt. Demand growth last year at 1.6. This year projected to be 1.4. If you project the normal demand of the last few years the world will be well over 100 Mbpd by 2020 and close to 107 Mbpd by 2025. If electric cars really take off maybe 105.
    In the midst of all this demand destruction and pod, fact is the world appetite for oil is still steady as she goes.

  8. Davy on Thu, 16th Mar 2017 6:21 am 

    “Paul Brodsky: “Stagflation On The Horizon”
    ‘http://www.zerohedge.com/news/2017-03-15/paul-brodsky-stagflation-horizon”

    “Stagflation on the Horizon…Logic and current trends suggest that declining output growth accompanied by higher prices will begin hitting economies and facing policy makers in the coming years. Even if raising the debt ceiling goes smoothly, we think global output will continue to drop. Using debt to promote output growth is playing out across the world. Despite massive debt growth, output is static or declining in Europe…China…Japan…and even India.”

    “Inflation…We expect rising inflation to accompany falling output, and to understand why we offer a wonky but practical discussion of inflation. Classic economics suggests demand and inflation should track each other higher and lower. Such a correlation, however, is not as tight in real life as it is conceptually. Super-economic factors associated with the exogenous management of global trade and credit greatly affect supply in ways often unintended by policy makers. From time to time supply shortages arise independent of the economics of production and demand. This creates significant economic dis-equilibria, leading to substantial inflation.”

    “Imminent Problem: A Scarcity of Dollars…There is also a scarcity of dollars held in foreign hands relative to the scale of the global economy. This will lead to a decline in dollar reserves held abroad. Recall that global trade volume is mostly based in dollars. A decline of dollars held in reserve limits global trade, pushing global output down. This, in turn, speeds incentives to raise the status of other major currencies to compete with the dollar.”

    “US dollar Leverage…To date, US bond issuers have had an easy time servicing their obligations because the dollar has been strong and they have produced sufficient revenues in dollars. The more pressing problem may arise from non-US issuers of dollar credit, which has doubled over the last ten years to $10 trillion. This credit also has to be serviced, rolled over and repaid in dollars. We anticipate increasing pressure among non-US dollar creditors to obtain dollars as the Fed hikes US interest rates, strengthening the dollar further.”

    “We argue the US economy, US assets, the Fed and US fiscal policy makers are displaying obvious signs of late-stage fatigue associated with protecting the current global regime at all costs. As in the 1970s, the triggers for goods and service inflation within a slowing global economy will be currency related and a dearth of supply flowing through the trade channel, but rather than oil, this time the world will lack an adequate supply of increasingly scarce dollars needed for debt service.”

    “The Political Solution: Dollar Inflation…The exogenous influence that would produce global economic dis-equilibrium and bring about stagflation today would be money itself, specifically US dollars…To produce consumer inflation coincident with declining or contracting output, there must be an exogenous influence over prices outside the reach of central banks. We believe that influence is actually – and ironically – contracting production. The less production in an economy, the less influential that economy’s factors of production are in the global economy, and the less influence its central bank has over the global supply of goods and services…Our guess is that the Fed would like to hike rates as much and quickly as possible over the next two years so that it can then reduce them – to weaken the dollar – as global output sinks deeper.”

    “In the end, the Fed will not be able to protect unilateral US dollar hegemony. Officials at the Fed and other major central banks, working bilaterally and with the BIS, IMF and WTO, would have to try to bring the purchasing power value of all currencies down together in relation to the real value of global production. Doing so successfully would be a monumental bureaucratic undertaking. We imagine it will be messy from social, political, economic and, especially, financial perspectives. The Fed will have to turn on the spigots and create dollars for US and foreign creditors and, if they are lucky, debtors too. Stagflation will appear. The markets should begin getting a whiff of this soon.”

  9. Davy on Thu, 16th Mar 2017 6:21 am 

    I am posting the above article to reference a basis to global decline. It along with declining economic energy, planetary system decline, climate disturbance, and social instability will conspire to cause a momentum of decline to our growth based modern civilization. I believe we are already in this decline process or very near it. We are in the part of the process that is characterized by turbulence. It is growth but growth that is malinvestment. It is about extend and pretend of earlier malinvestment. It is also about current investment that is not a proper investment for a global world in decline hence more and worse bad debt.

    This is the economic side of global decline. The others mentioned are influenced by this economic factor. All the mentioned factors are interrelated and without solutions. We can adapt to them and maybe slow some of the effects with good policy. Policy is going to get continually worse because we are applying policy for different times. Growth based policy to renew growth is poor policy when this new time is no longer growth based. This is the key point of a paradigm shift in existential growth of our current civilization that is global and all inclusive. This decline process is different because it represents the “life current” in human civilization and is planetary. You can’t make policy to change this declining “life current” you can only adapt to it. We are trying to change it and it is actually getting worse. This is understandable because the proper policy will involve pain and hardship and will involve the end of our current status quo of a growth based modern civilization. Populations must drop to accommodate deceasing output. Life is cyclical and involves the appearance of frequency modulation so this may be cyclical but cyclically down not up. In the past we were always on the up but now we are on the down.

    This is going to be realized in a broad based demand destruction. It will be manifested in systematic dysfunction and economic abandonment. This will be a process over time and location based. This means it will be spread throughout the global system with dispersed risk and variable crisis events. This will make our efforts to combat decline worse because of improper policy. In effect we will waste valuable resources both physical and abstract to maintain the status quo that is not maintainable. Some areas will look healthy as others fail when the reality is the complete foundation is in decay. This has been the case will all previous civilizations it is just this one is complex and global.

    This referenced article highlights stagflation. Current stagflation is being manifested with declining global production (demand destruction) and a shortage of dollars as the fiat representation of supply. We are going to have a dollar shortage drive inflation along with declining global production. The dollar shortage is related to debt both US and non-US debt both dollar denominated. When global output drops (dollar) debt is less serviceable. It becomes a cycle of less dollars pushing lower output that pushes less dollars. Contracting global output is outside of central bank influence and is the driver today of stagflation.

    When one adds stagflation to the global decline equation we can see eventually with a growing world population coupled with resources limits and diminishing returns to technological progress we have a perfect storm of decline. This is made permanent by a decline of the planetary system with ecological decline and localized failure and climate disruption.

    Energy is going to be influenced by this by appearing to be in surplus when the reality is the declining global output is at the same time destroying supply potential. Surplus energy is available because real demand continues lower. This supply potential will be affected by stagflation of increasingly more costly capex and increased difficulty servicing current debt dropping demand growth further.

    The current growth rate of energy as well as global growth is in decline but growth is not in decline. This is the deceptive results of this process. The social narrative is positive and points to optimism. This is mainly technological and also concerns wealth transfer. This narrative is also expressed by the moral hazard of extend and pretend policy. We are not acknowledging bad debt as normally is manifested by a recession that in the past cleansed the system of bad debt. We are now banking bad debt and in effect dispersing risk throughout the system. This allows economies to continue to grow at the top as the bottom is gutted.

    At some point the actual “real growth reality” will acknowledge decline. This means a shattering of the growth narrative and an exposure of policy failure. At this point you move from stagflation to the hyperinflation of loss of confidence. There is no way to know the time frame of this and the precise locations of its surfacing. This existential crisis of globalism and modernism is dependent on too many converging pressures. What is clear is this may be our end game as we wander in a fog of decline that is unfamiliar and new for a civilization only knowing growth for the last several centuries.

  10. onlooker on Thu, 16th Mar 2017 7:05 am 

    Yep, “There is no way to know the time frame of this and the precise locations of its surfacing.” Humans are unpredictable.. But, one thing is certain, the momentous forces pushing for unraveling are irresistible. Oh and Stagflation is irresistible. Just a cursory understanding of a our modus operandi the last few decades of continuous unfunded liabilities, reckless debt/money creation,and consequent asset appreciation, over exuberant markets, increasing scarcity of economically viable resources and finally an energy system teetering should inform anyone of the Stagflation eventuality

  11. twocats on Thu, 16th Mar 2017 8:15 am 

    Boat – That top chart is full o shyt. Demand growth last year at 1.6. This year projected to be 1.4.

    Exactly. It took me a second to realize that was a projection, not history. this article offers ALMOST NO EVIDENCE for why it thinks demand will drop. And the excuse-of-the-past-year has been the Paris climate agreement, which is now worth jack-squat with the rise to power of DJT.

    Expect demand to continue and accelerated depletion (at an economic loss) to meet that demand with little investment in the future.

    Extend and pretend to the very end.

    as for all the POD exploding all around us, well, we got runaway climate change to deal with as well, so i imagine pretty soon we won’t have time to worry about it.

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