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Page added on November 29, 2018

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The romance of drilling for oil has peaked

Production

When the price of crude oil goes through one of its periodic downturns, as it is doing now, it sends a shiver through the oil industry. History promises that higher prices will return. Until then, US shale companies are under severe pressure and big oil companies wonder about the viability of new projects.

There is more to worry them this time: not just the 29 per cent fall in the price of Brent crude since the start of October as Russia and Saudi Arabia pump more oil, but the fear of this bear market enduring. The romance of oil exploration is fading at companies such as Royal Dutch Shell, BP and ExxonMobil as they rethink the way they have operated for decades.

“Peak oil” used to mean the Malthusian fear that a limited natural resource would run out, leaving the world without hydrocarbon supplies to power economies. Now, it has come to mean the opposite: the prospect of demand peaking in the next 20 years, and reserves being left in the ground because they are not needed.

Coal use may already have peaked according to the International Energy Agency. The consultancy Wood Mackenzie predicts that demand for oil will peak in the late 2030s. For companies that routinely spend tens of billions on big exploration projects that can keep producing oil for several decades, that is not merely futurology. It is a clear and present danger.

From society’s point of view, this is welcome. The rise of wind, solar and other alternative energy sources, the switch from internal combustion engines to electric motors in vehicles, and higher energy efficiency all increase the likelihood of being able to limit carbon emissions. But it leaves oil companies as we have known them casting around for a future.

One option is to transition from oil to gas, as Shell has done by investing more in gas exploration and operating 13 liquefied natural gas facilities. Gas is a fossil fuel but gas-fired power plants are better for the environment than coal-fired generators and gas demand is expected to keep rising.

This allows companies to carry on doing roughly the same thing, with similar workforces and cultures. Deep water exploration, the speciality of their engineers, will still be required and gas can be a feedstock for their chemicals plants. It is the natural way to go for those wanting to be disrupted as little as possible.

A second option is to transform oil companies into energy companies that are agnostic about sources — they will build wind and solar farms as enthusiastically as drilling for oil or gas. Scandinavian energy companies are heading in that direction. The Danish group Dong sold its North Sea oil and gas assets last year, concentrating on renewable energy including wind, and renamed itself Orsted.

That is the cleanest long-term approach but not everyone can choose it. The fact that oil demand will peak within most people’s lifetimes does not mean it is going away entirely. Economic growth and a rising middle class in developing economies will maintain demand not only for internal combustion engines but goods made with plastics derived from oil and gas.

It also involves greater challenges than rebranding suggests. Building offshore wind farms in the North Sea has similarities to drilling for oil, but power generation and producing batteries for electric vehicles do not. Transformation will not be easy — executives have to deploy different skills, invest capital differently, and change their entire approach to running operations.

The third option is to be humbler. Since oil-producing nations formed state-owned oil companies and took control of reserves from the 1970s onwards, western oil groups have taken pride in buccaneering deep water discovery in the North Sea and other fields. The companies were run by engineers who were happiest prospecting for oil that would always be prized.

That caused a lot of waste — scaffolding left on rigs for a year because there was no need to economise, and constant stretching to the boundaries of technological expertise. Then came US shale, and smaller operators that can sink a well in North Dakota for less than $10m. They operate more like manufacturers by trying to keep costs down and adjusting nimbly to market conditions.

The oil majors have been trying to follow their example, and must go further in reining in past ambitions. As the financial risks grow in exploration, oil companies have to shift towards the less exciting but steadier business of processing chemicals. It is no coincidence that most of today’s chief executives formerly worked in chemicals as poor cousins to explorers.

Many oil companies are trying out a mixture of strategies, becoming both humbler and more diversified. There is no shame in that — many industries pass through phases of glory when they throw investment at a new technology, only to settle down and rationalise later. The prospect of peak demand is making oil companies normal.

But the choice is going to get harder as that moment draws closer: within a decade, they will have to place their bets. They were formed in one world and another one is looming.

FT john.gapper@ft.com



6 Comments on "The romance of drilling for oil has peaked"

  1. penury on Thu, 29th Nov 2018 5:54 pm 

    Live in hope, die in despair, Will be ever thus.

  2. twocats on Thu, 29th Nov 2018 7:04 pm 

    “When the price of crude oil goes through one of its periodic downturns, as it is doing now,”

    and there is the lie – right in the first sentence. and then the rest of the article is just “peak demand” nonsense.

    but this idea that the recent fall in oil prices is normal or in-line with historical patterns is patently false. oil volatility has spiked since 2002 and it’s only gotten worse post-2008. Even the “normals” are bizarre – $100 a barrel for years when the long-time historic average is closer to $20. Sub-$40 when the marginal barrel costs $50.

    we are in the carnival house of fun where things are shifting in mirrors and under your feet. right now – shale companies are absolutely puking – and the banks that supply them with never-ending amounts of cash are beginning to worry. it’s starting to become obvious that the industry is unmanageable and will only lead to misery.

    but! I have gas to drive to work, and heat the house, so its cool.

  3. Roger on Thu, 29th Nov 2018 7:10 pm 

    What a moron. This one takes the cake!

    ““Peak oil” used to mean the Malthusian fear that a limited natural resource would run out, leaving the world without hydrocarbon supplies to power economies. Now, it has come to mean the opposite: the prospect of demand peaking in the next 20 years, and reserves being left in the ground because they are not needed.”

    As any moron can see, production has already, or will soon, peak. “Twenty years” may as well be 2000.

  4. makati1 on Thu, 29th Nov 2018 8:26 pm 

    USA today headlines:

    “Trump’s 757 Jet Clipped In Accident At LaGuardia Airport”
    “California Democratic Party Chairman Resigns Over Accusations Of Sexual Harassment”
    “GoFundMe Page Seeking $920 Million To Replace Malfunctioning New Jersey Bridge”
    “Let There Be Light: The Documentary The Army Suppressed” (Veteran suicides)
    “These Countries Are Quickly And Quietly Dumping The Dollar”
    “Michigan College Is “Arming” Students Against Mass Shooters…With Hockey Pucks”
    “Rising Rates Are Killing The Housing Market”
    And on and on.

    I won’t even get into the political freak show. LOL

  5. george on Fri, 30th Nov 2018 1:35 pm 

    This article left me wondering just who is going to pay for that half a trillion quatloos for all of this fracking ?
    You can bet your life it won’t be the banksters.

  6. rockman on Fri, 30th Nov 2018 2:37 pm 

    George – The banks have provided little of the capex used to provide capex to the companies chasing the shale plays. Most have come from the bond investors. If some future payments are unable to be paid the result will be the same as it was for the bond investors groups that provided capex to the 80+ companies that filed Chapter 11 bankruptcy when oil prices first collapsed: they get f*cked for the most part. The companies themselves typically clear Chapter 11 in good financial condition after the bond investors suffer most of the losses.

    Neither the govt nor anyone else have a history of bailing out bond investors. They make rather risky investments to potentially earn high rates of return so no one, including the bankruptcy courts, feel any obligation to protect them.

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