Energy Supply And The Future Of The Oil And Gas Industry
Part 3: What must the oil industry do to meet demand through 2050?
In the first two parts of this series, I talked about world energy supply and demand over the next few decades, pointing out that all credible energy forecasts show humanity using more and more fossil fuels, at least into the 2040s.
Energy demand is skyrocketing in the developing world, and people in OECD countries show no signs of cutting energy consumption — meaning continued heavy reliance on fossil fuels, as renewables struggle to gain a significant position in power generation.
Pressure is thus on the oil and gas industry to increase production for decades to come. World oil demand is reaching 100 million bbls/d this year, and most forecasters see it continuing to grow into the 2030s or longer. Natural gas demand is growing even more quickly as it replaces coal as the most reliable and economical baseload power and heating fuel.
How will the oil and gas industry meet these needs? And how can it do so in the face of challenges from “green” activists who continue to insist, against all reasoned analysis, that we must and will cut oil and gas production?
There are many approaches, including:
- Innovative technology — industry continues to improve horizontal / multi-frac technology, but advances are expensive and there are physical limits to moving large hydrocarbon molecules (oil) out of small, poorly-connected pore spaces. Wood Mackenzie recently reported poor first-year production results from the Austin Chalk tight oil play in Louisiana, suggesting that even with the best current technology, the reservoir cannot be fractured sufficiently to generate economic returns at oil prices below $100/bbl;
- Hand in hand with technological innovation, industry can improve efficiency by recovering more oil from established conventional and unconventional pools, particularly with enhanced oil recovery (EOR) techniques such as waterfloods and miscible floods. This concept has been worked pretty hard, and we have found that only certain reservoirs are amenable to substantial EOR gains;
- Accelerating development of known resources in established areas — two of the best examples are Canada’s oilsands and the Permian Basin in Texas. The supply is undoubtedly there, but recent history shows there are substantial real (and political) constraints in building the infrastructure to produce and transport more oil from even the most prolific basins;
- Exploring new basins — there are many sedimentary basins in the world that have seen little petroleum exploration. But there are several challenges:
- Some basins are petroleum poor, such as the Nechako and Bowser Basins in Western Canada, or the Karoo Basin in South Africa. Other basins with proven petroleum systems — such as the Zechstein Basin onshore Europe — produce a high percentage of inert gases (nitrogen and CO2), reducing net volumes and value;
- Many unexploited basins are very remote and/or inaccessible — located, for example, in deep oceans (the subsalt plays offshore Brazil) or in the high Arctic (Canadian Arctic Islands). Access is hugely expensive and risky;
- High political risk for new development —This idea used to refer only to companies being reluctant to enter countries with unstable, undemocratic governments, for fear of being nationalized or having assets destroyed during periods of unrest. More recently, political risk has grown to include regulatory and political issues making it difficult to gain approval for new oil and gas projects. Canada is the perfect example;
- At a recent address in Calgary, the president of the African Development Bank stated the Bank preferred to support renewable energy products in Africa over new oil and gas developments. And some countries favour domestic National Oil Companies (NOCs) over more sophisticated and efficient international majors. These attitudes add to political risk for companies looking to enter a new basin;
- Even in countries open to new development, lack of geological / reservoir knowledge and production infrastructure imposes high levels of exploration and development risk that few companies can shoulder. In the Indus Basin of Pakistan, which has been explored for more than 50 years, exploration is hindered by limited access to good regional datasets and limited geological study.
On top of these exploration challenges, industry has cut exploration spending drastically since 2014 in response to low oil prices. Existing fields are being depleted while years have been lost in finding new reserves — so now industry must ramp up even more sharply.
Bloomberg recently reported a JPMorgan Chase analysis showing major international oil companies must spend “monumental” dollars to lower their carbon footprint. In part, they are advised to accomplish this goal by being more efficient in their production operations — but they are also told they must increase the proportion of their capital spending on low-carbon fuels and systems to 17 per cent by 2025.
But oil and gas companies have their hands full in meeting the ever-increasing demands for their primary products — so why should they divert their funds and energies to produce other fuels? JPMorgan suggests “investors” are demanding they do so. But do investors — who generally demand good return on their investment — really want this, given the majors’ expertise in finding and producing oil and gas, and the uncertain economics of many renewables?
I suggest this is not the case. Anti-fossil fuel groups have obviously convinced many governments and JPMorgan Chase that a massive worldwide conversion to renewables and away from fossil fuels is going to happen overnight, any day now. But everything I’ve discussed in this series of articles indicates otherwise.
And the final words — human capital. To meet society’s needs for oil and gas in the coming decades, industry needs smart, educated people doing solid technical work and making new technological advances. But both bright young minds and mature experienced professionals are being driven away from the industry by a difficult investment climate and hostile societal attitudes. New graduates (and industry veterans) contact me every day, looking for opportunities to work. So the human capital is there now, but it is being squandered, and may not be available by the time society reaches out to use it.
Does society have the will and the sense to keep investing in oil and gas to carry us through to that day in the distant future when we can actually meet our needs with alternative energy sources, or will we create critical energy shortages worldwide much sooner?