Under a scenario where fossil fuel use is restricted to limit global warming to 2°C, oil use would be significantly more limited. The IEA’...
Under a scenario where fossil fuel use is restricted to limit global warming to 2°C, oil use would be significantly more limited. The IEA’s 450 Scenario (consistent with a 50% probability for less than 2°C global warming) projects global oil demand to rise slightly to 93.7 million b/d in 2020 but thereafter fall to 74.1 million b/d by 2040. By comparison, coal consumption would fall 38% over that period and natural gas demand would rise 16%.1 According to Norwegian oil firm Statoil’s 2°C Renewal scenario, and assuming accelerated clean technology transitions, for instance, oil use would be about 15% lower than today at 1 International Energy Agency, World Energy Outlook, 2015. 4 below 80 million b/d by 2040 and coal use would drop precipitously to only 14% of primary world energy demand. Under the Statoil scenario, natural gas would rise to 24% of primary energy, up from 21% today.2 A similar scenario study by the University of California, Davis, suggested that several emerging factors – efficiency technologies for advanced vehicles, logistics planning and freight, changes in urban transport patterns that cap personal vehicle ownership and congestion, and slower than expected economic growth in key Asian economies –
could bring a temporary peak of oil demand in transport in the next decade or so. Population growth and expanding wealth effects, without strong policy interventions, will eventually overwhelm these improvements, allowing oil demand in the transport sector to reach 55 to 60 million b/d by the 2040s, compared to 52 million b/d in 2015. This outlook contrasts with the IEA Current Policies Scenario of 75 million b/d for transport oil demand by 2040 (based on today’s policies only) and ExxonMobil’s 2015 base forecast of about 69 million b/d by 2040.
Shifting Strategies If industry and markets become more confident in a peaking, or at least a flattening, of oil demand growth, a change in investment and production strategies is likely to emerge, both among private companies and within OPEC itself. That means even if oil markets tighten in the next year or two, players will have to think twice about delaying the development and production of reserves, lest they disadvantage themselves over the longer term. Only parties that have no choice (lack of finance, geopolitical barriers, inability to organize investment due to bureaucratic failures, etc.) will be left out of the calculation whether to consider the remaining “carbon budget” for global oil production in deciding how much, and when, to invest to monetize existing reserve holdings. Companies will also have to consider when it no longer makes sense to continue exploration for new resources in high-cost, long lead-time environments as countries with large, low-cost reserves more aggressively pursue a market share-oriented strategy for their remaining oil and gas assets. In this possible environment, to continue to attract investors and capital, the oil and gas industry as a whole must develop a value proposition that is consistent with its core production not growing as overall production growth may not be possible for all players. To deliver bottom-line value growth with stable top-line production, standardization, repetition, low-cost solutions and manufacturing processes will probably play a key role in reducing costs and increasing margins. This will partly be driven by consolidation in the industry and partly by competitive pressures and cooperation between the industry and its suppliers. This is a fundamental change for an industry geared towards tailor-made solutions to seek competitive advantage. 2 See Statoil’s Renewal scenario presented in Energy Perspectives 2015. Click here. To balance cost challenges against the possible need for new reserves, a leaner and more efficient industry is required both in execution and operation. Companies will need to be prepared to deliver significant volumes of oil and gas at competitive returns, even if prices remain low and carbon externalities are priced more accurately. The industry will undergo a new technical revolution, with significantly higher levels of artificial intelligence and automation and remote operation and management. The new leaner environment will impact the supplier industry, including local content in host nations, and adversely affect national revenues achievable from the oil sector.
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