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Will The Third Great Energy Revolution End The Oil & Gas Industry?

Will The Third Great Energy Revolution End The Oil & Gas Industry? thumbnail
Oilfield

The history of crude oil and natural gas is a history of technological innovation. Until recently the innovation supported crude oil and natural gas. Now, it challenges it, causing structural changes in the crude oil and natural gas markets.

Originally, crude oil was only used for lighting. This changed following the invention of the internal combustion engine, which outperformed steam engine in power, range and ease of operation and maintenance, and the invention of the conveyor belt, which made it possible to mass-produce the internal combustion engine at a price which was affordable to the masses. Not much later, crude oil became the transportation fuel of choice. The horse drawn carriage was replaced by the car; the locomotive by the diesel train; the steamship by the motor vessel; and the zeppelin by the airplane.

For a long time, natural gas was an unwanted by-product from crude oil production, and typically burned off (flared) at the production site. That was until, again, technological innovation made utilization of the benefits in natural gas possible. Improvements in pipeline technology made it possible to use natural gas as a feedstock for the chemicals industry, and as fuel for home heating, cooking and power generation. Later on, LNG technology improvements greatly expanded the market for natural gas and made it truly global.

Technological innovation was therefore not only behind the first great energy revolution—from wood to coal—during the Industrial Revolution of the 18th and 19th century, but also behind the second great energy revolution—from coal to crude oil and natural gas—during the first half of the 20th century.

American Energy Consumption by Source, 1775-2012

(Click to enlarge)

Source: Energy Information Agency, via Bloomberg

Now, in 2017, crude oil and natural gas, the great beneficiaries of earlier technological innovation, find themselves challenged because of continued technological innovation. Innovation in (battery) technology has made the electric drivetrain a serious competitor for the internal combustion engine, leaving crude oil challenged by electricity while at the same time that natural gas is being challenged by solar and wind in electricity generation.

This has led some to predict the imminent demise of the oil and gas industry. But is this the correct conclusion?

We must remember that both crude oil and natural gas are not solely used for transportation (crude oil) and electricity generation (natural gas). And some of the drivers of crude oil demand, such as heavy duty hauling and aviation, will remain unaffected by the electrification of transportation trend. The same goes for natural gas, which will remain the main source of chemicals and energy for the heavy-duty industries such as steel, aluminum, cement and paper.

Even if the current expectations around technological innovation materialize, it will still take time before crude oil is comprehensively outperformed by electricity in transportation and natural gas by solar and wind in electricity generation.

Along with battery innovation, the electrification of transport also requires the development of recharging infrastructure. In areas where most houses have garages this is less of an issue, as their electric cars could be charged overnight at home. And since overnight charging means charging during off-peak hours, this wouldn’t be an immediate issue for most existing power grids. In areas with many homes without garages, however, a publically accessible charging network will need to be established. The most sensible solution for such areas is to equip public parking and office parking spaces with chargers (a fantastic business opportunity for utility companies!), but this requires collaboration between city planners, real estate developers and entrepreneurs, all of whom, barring a few exceptions, have only just begun thinking through the implications of electric transportation. Thus, it will most likely take years—possibly even decades—for many areas around the world to become truly supportive of the electric transportation trend.

The shift from coal- and gas-powered electricity generation to wind and solar faces similar practical hurdles in many parts of the world. In wealthier countries, funds will be available to finance a relatively fast transition, which will include early retirement of coal and gas plants. In countries where the grid is immature and investment is necessary, this investment can quite easily be directed toward solar and wind and away from coal and gas, leading such countries to skip the coal and gas age and move straight into the renewables era. Countries with existing coal- and/or gas-based electricity grids—whether poor or faced with competing priorities (growth or sustainability?)—will be more inclined to leverage the existing infrastructure as long as possible, however, ensuring continuation of at least part of current natural gas demand for electricity generation for a long time to come.

So even under the most optimistic forecasts for technological innovation, usage of—and thus, demand—for crude oil and natural gas will likely remain well into the future, but could soon reach a peak.

That doesn’t mean that the oil and gas industry will stay the same and has nothing to worry about. The mentioned technological trends will definitely create a completely different market dynamic. Managing profitability and growth in a flatlining or even shrinking market is completely different from managing them in a growing market, after all.

Natural decline will demand continued investment in crude oil and natural gas resources to be able to continue to meet demand, under both kinds of market conditions. However, in a growing market natural decline is a much bigger challenge than in a flatlining or shrinking market, as in the former more than the natural decline will have to be added to production, while in the latter less will already suffice.

In a flatlining or shrinking market for crude oil and natural gas, oversupply will therefore be a continuous threat, making the kind of pressure on the price that the oil and gas industry has experienced over the last few years a permanent reality—think “lower forever” instead of “lower for longer”. In this environment, competitive advantage is in the lowest cost resources and operations. In the former, the NOCs have the edge over the IOCs; in the latter, however, most NOCs remain outperformed by their international counterparts.

Also, in a flatlining or shrinking market, growth can only be achieved through consolidation. Only the very best performing IOCs will be granted access to the resources of the not-so-well performing NOCs, while the IOCs with anything less than stellar performance will exit the market, as the low-price environment will push many NOCs to upgrade their own capabilities to ensure continued profitability.

This exit from the market by the IOCs with less than stellar performance will either be through bankruptcy or diversification into a new market with continued growth potential. Thus, there can be no doubt that diversification is now an urgent must for all IOCs to ensure long term growth and hedge against the risk of eventual obsolescence.

By Andreas de Vries for Oilprice.com



18 Comments on "Will The Third Great Energy Revolution End The Oil & Gas Industry?"

  1. Cloggie on Sat, 4th Nov 2017 8:12 am 

    https://windeurope.org/about-wind/daily-wind-archive/2017-10-28/

    Saturday October 28 was a very windy day, so much so that 25% of EU electricity demand could be covered with it:

    1. Denmark: 109% = 91 GWh

    2. Germany: 61% = 793 GWh

    3. Portugal: 44% = 53 GWh

    4. Ireland: 34% = 32 GWh

    5. Austria: 33% = 48 GWh

    6. Spain: 31% = 185 GWh

    7. United Kingdom: 29% = 207 GWh

    8. Netherlands: 25% = 72 GWh

    9. Sweden: 24% = 82 GWh

    10. Poland: 22% = 101 GWh

  2. jawagord on Sat, 4th Nov 2017 8:43 am 

    Cherry picking season is over Cloggie, like wind power you only get it periodically, check Germany’s Nov. 3 wind and Solar.

    https://www.energy-charts.de/power.htm?source=all-sources&week=44&year=2017

    Fossil fuels haven’t been replaced by nuclear power they certainly won’t be made redundant by intermittent renewable power. History shows we continue to find uses for fossil fuels that optimize their utility. My grandparents used coal to heat their home, my parents used fuel oil, now we use natural gas, a few use electricity but the world still uses record or near record amounts of oil and coal for transportation and power generation respectively, where the utility is high. We will continue to find uses for these fuels along side nuclear and renewable sources.

  3. Cloggie on Sat, 4th Nov 2017 8:54 am 

    Cherry picking season is over Cloggie, like wind power you only get it periodically

    Open door, everybody knows that, that’s where storage comes in. Wind and solar are meanwhile sufficiently mature. The bottle neck is storage. The whole world is working on it. Patience.

    We will continue to find uses for these fuels along side nuclear and renewable sources.

    Perhaps you would care to read this and grasp its meaning:

    https://en.wikipedia.org/wiki/Paris_Agreement

    Of course we could “find uses for fossil fuel”.

    The sport is to not find these uses but instead let the stuff in the ground.

  4. Davy on Sat, 4th Nov 2017 8:59 am 

    Dumb n Dutch, real storage solutions for a continental grid are a pipe dream. FRAUD

    Paris accord is a fake green FRAUD

    Continue on dumb with your frauds, dumb

  5. Cloggie on Sat, 4th Nov 2017 9:50 am 

    Clogmeister, real storage solutions for a continental grid are a pipe dream. FRAUD

    Whooptido, the wheelbarrow guy has opinions about continental grids, no less.

    More distinguished people than the 1%-er-turned-goat-dung-handler beg to differ:

    https://deepresource.wordpress.com/2017/08/12/renewable-intermittency-continental-scale-is-the-solution/

    https://deepresource.wordpress.com/2017/09/16/can-society-run-on-renewable-energy-alone/

    https://deepresource.wordpress.com/2013/06/13/norway-europes-green-battery/

    Paris accord is a fake green FRAUD

    Yeah we should accept the lead of luminaries such as there are the US and Syria, the only two countries that refused to sign the Accord.

    And since in the eyes of Furious Dave, the US, like the Pope, can’t be wrong in anything, we are summoned to abandon Paris.

    #WaitingForGodot

  6. Davy on Sat, 4th Nov 2017 10:22 am 

    Dumb n Dutch, empty links from your personal extremist library are not valid. Please show respect for those who are honest and balanced. Storage strategies for a
    Continental sized grid are a pipe dream. FRAUD

    The Paris accord is a fraud. It allows China to build out hundreds of coal fired plants and you support that. You are a fake green fraud dumb n Dutch. You deny climate change anyway so why all the talk about the fake geeen Paris accord? You are a science denier unless it supports your agenda. FRAUD

  7. Cloggie on Sat, 4th Nov 2017 10:52 am 

    empty links from your personal extremist library are not valid.

    Meet Davy’s “extremists”:

    https://www.youtube.com/watch?v=1vlRnyzeYco

    I have Davy now so far that he wakes up and goes to bed with his “dumb and Dutch” obsession.

    I hope Davy’s goats don’t suffer too much under his obsessions and regularly get fed.

    The Paris accord is a fraud. It allows China to build out hundreds of coal fired plants and you support that. You are a fake green fraud dumb n Dutch. You deny climate change anyway so why all the talk about the fake geeen Paris accord? You are a science denier unless it supports your agenda.

    https://en.wikipedia.org/wiki/List_of_countries_by_carbon_dioxide_emissions

    Per capita emission ranking:

    USA 16
    Germany 10
    China 7

    It looks like the US is the least positioned to criticize Chinese emissions.

    For me it is OK that the US opted out as it puts them on a distance on a key issue with the rest of the industrialized world.

    #OneCompetitorLess

    Continental sized grid are a pipe dream. FRAUD

    Don’t expect the “Great Thinker” from Missouri to substantiate his assertions in any way, just postulate and add an all-caps bombastic expletive to finish it off.

    The purpose of his posts is none other than a possibility to launch an insult, which he thinks is effective where in reality it makes him look like a tattooed trailer park thug.

    He probably is.

  8. Davy on Sat, 4th Nov 2017 11:19 am 

    “empty links from your personal extremist library are not valid.”
    Dumb, you have not addressed this issue. You are a fraud when you link a personal link as a third party reference for your assertion. You are an intellectual liar. You are peddling an agenda instead of talking about the truth.

    What does your comparison have to do to the fact the Paris accord is a fraud? China gets to build out hundreds of coal plants across the world. FRAUD

    This is a good look at who is polluting CO2. Plenty of that in the EU, dumb n dutch
    “Explore the World’s Greenhouse Gas Emissions”
    “Find the newest data on global greenhouse gas emissions on CAIT Climate Data Explorer”
    http://tinyurl.com/m8vd29q

    dumb, you still have not explained how a continental sized storage strategy is possible in scale and affordability. You have said nothing. FRAUD

  9. jawagord on Sat, 4th Nov 2017 12:41 pm 

    “Wind and solar are meanwhile sufficiently mature. The bottle neck is storage. The whole world is working on it. Patience.”

    Not going to happen Cloggie. Solar and wind power generation will face their own Red Queen moment due to the short life cycle and diminishing efficiency of these generating sources.

    Wind turbines have a 20-25 year life span and suffer from power degration of 1-2% per year due to errosion on the blades and gear wear effecting efficiency. Solar panels exposed to the sun cycling hot and cold day after day have a “guaranteed” life expectancy of 20 years and performance degradation of 1% per year. Do the math, in 15-20 years the renewable industry will be running hard just to replace worn out equipment and will be lucky to maintain generating capacity, assuming the government subsidies are still in place to make it profitable. Battery storage has the same problems. Hence fossil fuels will be used for a long time to come.

    “Wind farms, at the end of the day, are equipment. And equipment wears out over time,” he said.

    The lifespan of the average turbine is 20 to 25 years. While new wind farms are going up, America’s first generation of wind farms are reaching retirement age, like the Xcel Energy’s Ponnequin Wind Farm on the border of Colorado and Wyoming. The farm of 44 turbines recently retired at the average age of 18 years old. In October of 2016, Xcel Energy plans to dynamite the turbines and cart off the waste to a landfill.

    http://insideenergy.org/2016/09/09/where-do-wind-turbines-go-to-die/

    http://www.windpowerengineering.com/business-news-projects/decommissioning-canadas-oldest-wind-farm/

    https://www.greenmatch.co.uk/blog/2015/01/the-lifespan-of-solar-panels

  10. Cloggie on Sat, 4th Nov 2017 1:21 pm 

    Wind turbines have a 20-25 year life span

    They don’t. They have a guaranteed minimum lifespan of 25 years but nobody really knows how long they will last because the technology is so knew.

    So far only two wind parks have been decommissioned and in both cases none of the wind towers had fallen over:

    https://deepresource.wordpress.com/2017/05/14/nuon-dismantles-offshore-wind-farm-in-the-netherlands/

    Excuse for taken them down: one blade had fallen off, which could have been easily repaired, but operator NUON used the opportunity because they were technically out of date, not physically. 4 turbines of 2MW together, were new offshore turbines have usually at least 5 MW capacity.

    This windmill in the Netherlands is from 1441 or older and is still used for corn grinding:

    https://www.youtube.com/watch?v=GuT5vNljXVk

    Hundreds of century old windmills still exist and operate, like this century old sawmill:

    https://www.youtube.com/watch?v=Q6FxG3ll-lw

    My favorite example is the Eiffel tower, that was designed to last for the duration of the World Exhibition of 1887 and was expected to be taken down again after a few years… until they didn’t. The structure now exists for 130 years and currently engineers see no reason why the tower should not last for another 3 centuries.

    Wind towers same story. Yes you need to replace blades and gears regularly, but the tower, foundation and nacelle are the most expensive parts.

    Here is a Danish offshore farm that was decommissioned after 26 years. None of the 450 kW turbines failed technically, they were just judged to be out of life economically.

    https://deepresource.wordpress.com/2017/08/17/worlds-first-offshore-windfarm-vindeby-decommissioned/

    25 years? First see, then believe. I would bet on 50 years or more.

  11. Davy on Sat, 4th Nov 2017 1:23 pm 

    Oops. Dumb n Dutch. That is reality and it just smacked your ass.

  12. Cloggie on Sat, 4th Nov 2017 1:44 pm 

    Regarding solar panels, it is way too early to tell their life time. But there are encouraging signs.

    Solar cells began in space. Many satellites still function on them.

    More anecdotal evidence:

    http://www.greenbuildingadvisor.com/blogs/dept/musings/testing-thirty-year-old-photovoltaic-module

    A 30 year old panel did better than the spec, that is better than 0.27% performance degradation or 30 x 0.27 = 8.1%, which is perfect. They could last perhaps for a century and lose only a quarter of their original power.

  13. Cloggie on Sat, 4th Nov 2017 1:47 pm 

    New method of storing wind energy:

    https://deepresource.wordpress.com/2017/11/04/worlds-largest-windturbine-nears-completion/

    Oops. Dumb n Dutch. That is reality and it just smacked your ass.

    The guy is getting pathological. Is there a doctor in the house for some first aid or oxygen?

  14. Davy on Sat, 4th Nov 2017 2:39 pm 

    Dumb n Dutch, you already have issues of scaling up a 100% renewable world then you add to that entropic decay of all that equipment and what you have is the magic red queen predicament. Not only are you fantasy featuring this shiny new world but you are not even obeying the math of scale and affordability. FRAUD

  15. rockman on Sun, 5th Nov 2017 10:57 am 

    Mother Nature guarantees an end to petroleum industry. Or at least a decline to an insignificant level. Whether the alts etc bring about a premature death remains to be seen. Kind of like cancer eating away at you but you die of old age before it finishes you off. You win!!! Sorta. LOL.

  16. Anonymous on Sun, 5th Nov 2017 12:01 pm 

    Everything ends eventually. Bu the peakers have a long history of predicting oil and gas peaks too early.

  17. Duncan Idaho on Sun, 5th Nov 2017 6:17 pm 

    “Over the last 20 years, the power industry has experienced a shift in steam turbine (ST) maintenance strategies driven by two compounding factors. The first factor has become the overwhelming task of managing the maintenance of newer technology – Gas Turbine (GT) related maintenance.

    These machines by design and operating profile require a greater frequency of maintenance than their
    steam turbine predecessors. Frequent GT inspections and repairs/upgrades have driven maintenance budgets to a point at which something has to give. The once well-cared-for work horse of the industry, the steam turbine has become a maintenance afterthought as funds are reallocated to GT issues. Major ST outage- intervals and inspection points are pushed out to support the expense and frequency of Gas Turbine inspections, repairs and upgrades.”

  18. Mick on Sun, 5th Nov 2017 9:30 pm 

    That picture looks like one of GSR sofa burning party’s

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