the future of the global oil and gas-1

7/24/2019 The Future of the Global Oil and Gas-1

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THE FUTURE OF THE

GLOBAL

OIL AND GAS INDUSTRY

IEA Energy outlook 2009

The world's energy resources are adequateto meet the projected demand increasethrough to 2030 and well beyond....

Fossil Fuels remain the dominant sources ofenergy worldwide, accounting for 77% of the

demand increase in 2007-2030.... The worlds remaining resources of naturalgas are easily large enough to cover anyconceivable rate of demand increase throughto 2030 and well beyond.


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The global demand for oil and gas willcontinue to rise over the next few decades; NOCs will continue to expand beyond their

home markets; finding new sources of oiland gas will get harder and requireinnovative new technologies;

investment in non-hydrocarbon energysources will continue; the industry willremain one of the most vital for the global

economy; and, despite the high prices ofrecent years, the industry will continue to gothrough up-and-down cycles.

1/19/2015 4

History 2011 Projections

0

20

40

60

80

00

20

1980 1990 2000 2020 2030 2040

28%

9%

32%

11%

20%

8%

26%

8%

36%

1%

19%

2%

Coal

Renewables

(excluding liquid biofuels)

Natural gas

Nuclear

Oil and other liquids

Liquid biofuels

2010

History 2011 Projections

0

20

40

60

80

00

20

1980 1990 2000 2020 2030 2040

28%

9%

32%

11%

20%

8%

26%

8%

36%

1%

19%

2%

Coal

Renewables

(excluding liquid biofuels)

Natural gas

Nuclear

Oil and other liquids

Liquid biofuels

2010


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Here we take a deeper look at the futureand discuss some of the key trends that willimpact the oil and gas industry.

We present our thoughts in threesegments

1. The products,2. The markets, and3. The players and their strategies.

As we discuss the trends, we identifyquestions that must be considered by thefirms that compete in the industry.

The oil and gas industry is a dynamic and

evolving industry.

Although the basic commodity products

are little changed from the earliest day of

the industry, the core activities of the

industry value chain change constantly.

It is a safe bet that a decade from now,

the industry will be vastly different from

today.


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The Products

We begin where all debates begin withregard to oil, the peak oil debate.

We then confront the growing challenge

of finding more oil, the emergence of

natural gas, and the pursuit of alternative

energy sources.
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Peak oil demand

In contrast to the peak oil argument thatthe world is going to run out of oil, the

global demand for oil will begin to drop in

the coming decades.

The demand for oil in the Organisation

for Economic Co-operation and

Development OECD developed

economies will probably peak in thecoming decade.

Organisation for Economic Co-operationand Development
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The OECD peak in demand will be a

function of several factors, including:

1. mature economies, an aging population thatdrives less (especially in Japan and Europeancountries like Italy and Spain);

2. greater fuel economy in cars and trucks(hybrids, advanced diesel engines, a shift tosmaller vehicles);

3. the introduction of electric cars;4. greater commitment to efficiency and

conservation;5. and the continued shift away from heating oil

to gas and electric.

Assuming shifts to new energy sources

occur, the overall demand for fossil fuels

will also peak in the coming decades,

although specific projections are difficult.

The demand for fossil fuels will fall

because of innovations in how energy is

produced, transported, and used.


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Whether it is algae, hydrogen, or some otherundiscovered technology, innovative ideaswill eventually supplant the need for oil andgas (if it is algae, the existing downstreaminfrastructure will remain viable).

Given the energy density of crude oil and itsease of transportation and storage, if a viablealternative liquid form of energy is invented,it is likely that the IOCs of today willcontinue to dominate the private sector sideof the energy business.


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At some point, the rationale for NOCswill disappear (when oil and gas

development is no longer economically

viable) and the private sector energy

companies will substantially expand their

role.

Finally, while oil demand will peak, it likely

will not happen on a global basis for

several decades at the earliest.

The demand for gas is another story and

will likely continue to grow for at least

three or four decades and remain

sustainable for a very long time.


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Crude oil: More distant, greater

depths, lower yield, higher costs Over the coming decades as demand for

oil reaches its peak, E&P firms will need

to find new sources of oil.

Some of that oil will come from new

technologies that allow for enhanced

recovery from existing oil fields.

Enhanced recovery plays a major role in

ensuring that older fields like Kern River

in California continue to be productive.


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A number of large oil-producing nations,including Iran, Mexico, and Russia, need

the capital and technological expertise of

the IOCs and large oil field service firms

to upgrade their poorly managed oil

fields.

Although new technology associated with

enhanced recovery will provide some

increased oil supply, significant new

sources of oil will need to be discovered.

The new oil wells will be at greater

depths beneath the earth's surface and

they will have lower yields and higher

costs than the oil fields of the past.


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Some of the new oil will come fromonshore wells in countries that aregeographically, culturally, and politicallydistant from consuming nations.

Assuming security issues are manageable,Iraq will become a much more importantoil producer.

In Africa, historically unstable countrieslike the Democratic Republic of theCongo will see exploration activity.


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Most of the new discoveries will be inoffshore areas such as Africa, Brazil,

Canada, and Norway.

The Arctic region could be very

productive as could the East and West

coasts of the United States although

politically, most of the United States

offshore regions are off limits and willlikely stay that way for a while.

To exploit these challenging fields, new

technology will be required and most of it

will come from the supermajors working

in conjunction with their major

contractors.

The potential risks of offshore drilling

have become magnified as a result of the

Deep-water Horizon oil spill.


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However, as oil demand increases, therisks will become more acceptable.

The costs will also be acceptable until the

point when peak oil demand occurs, at

which point technological innovation will

slow down and costs will plateau.

A shift to gas

In recent years some of the largest oil and

gas companies, including ExxonMobil and

Shell, have substantially increased the gas

portion of their product portfolio.

Most of the increase has involved LNG

and megaprojects in countries such as

Qatar, Papua New Guinea, and Australia.


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Reasons for increased gas emphasis

1. As access to oil reserves becomes moredifficult, E&P companies have shiftedresources to gas.

2. Mega LNG projects require huge amountsof capital, technology, and projectmanagement expertise all of which thesupermajors can provide.

3. Gas is a cleaner burning energy and there

is an ongoing shift from coal to natural gasas a source of energy for electricity.

In recent years, the financial performance

of gas projects has suffered because of

low gas prices.


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As the world comes out of recession andenergy demand grows, gas prices should riseand the megaprojects should pay off.

If prices stay flat, the supermajors could findthemselves with depressed returns oncapital employed for many years.

There is also the possibility that more GTLprojects will be developed.

If GTL costs become competitive relative to

oil, there could be a surge of interest in newdevelopments.

GTL projects


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Shale gas

Shale gas

Shale gas is transforming the natural gas

industry in North America, and a global

impact is likely.

Commercial quantities of shale gas will

probably be found in China, Australia, the

Middle East and North Africa regions,

Latin America, and Western Europe.

Shale gas will impact both the operations

of oil and gas firms and gas prices.
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On the operations side, shale gas wells requiredifferent skills relative to onshore and offshoreconventional gas projects.

Since shale oil wells cost as little as a few milliondollars each, gas producers have much moreflexibility in matching production with demand.

They can drill wells when demand increases andpull back during down cycles.

At the other end of the spectrum, megaprojectsinvolving multi-billion dollar LNG trains cannoteasily ramp production up or down.

With respect to prices, the new shale gas

production in North America will likely

contribute to an excess supply of gas.

A significant increase in shale gas supply

will result in gas prices remaining

depressed for some time and will put

pressure on suppliers to Europe and Asia

to adjust their prices downward.


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That said, there is still uncertainty as tothe minimum price that makes shale gas

unprofitable.

As a corollary, there is also uncertainty as

to the marginal cost of shale gas

production and how fast it will decline

with learning and the introduction of new

technology.

Substitute products andrenewable/alternative energy Every industry has the threat that

substitute products will erode the value

created by an existing set of products.

The oil and gas industry is faced with the

inevitable threat that new energy sources

will shift demand way from core oil and

gas products.


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Projections from the International EnergyAgency (IEA) under its 450 Scenario

(greenhouse gas emissions stabilizing at

450 parts per million (ppm) of CO2-

equivalent) see fossil fuels peaking in use

by 2020.

Under this scenario, by 2030 zero-carbon

fuels will make up a third of the world'sprimary sources of energy demand.


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A significant increase in the use ofrenewables and biofuels will be required

to meet the emissions target.

In addition, the IEA projects that the

energy sector will require incremental

investment of $10 trillion between 2010

and 2030, with much of the spending

needed to increase energy efficiency.

In the developing world, huge investments

will be needed for clean power, energy-

efficiency measures in industry and

buildings, and next-generation motor

vehicles


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we in Russia are well familiar with such amindset: it is akin to the Soviet-style planned

economy. And the result is also very well

known: under mandatory distribution, natural

incentives to improve competitiveness

evaporate. This is a disservice not only to

consumers but also to the new alternative

energy.

Realistically, significant developments inrenewable energy will not happen becauseof governments.

Governments may help in establishing basicconditions but innovative technologies have

always come from the hard work andpioneering genius of entrepreneurs.

One new energy company started by acouple of entrepreneurs is Sapphire Energy, acompany that recruited its president fromBP


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The Markets

Growing demand for energy in emergingmarkets

According to the IEA, 2009 was the first year thatChina used more energy than the United States.


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Although most of China's energyconsumption is from coal, the huge

increase in the use of automobiles (China

is now the largest car market by unit

volume) means that oil imports will rise

substantially in the coming years.

India is also experiencing significantincreases in energy demand.


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If China and India continue to experience 5%to 10% annual economic growth, theirdemand for energy will grow at similar orhigher rates.

Most other emerging market economies arealso growing and they will need more energy.

Although energy users will become moreefficient, as personal incomes grow there will

be growing demand for automobiles, airtravel, and products that consume electricity.

The demand for energy in emerging

markets will be the main driver of growth

for energy over the coming decades.

However, even with the demand for

energy growing globally, the demand for

oil as a source of energy is still expected

to peak, as we indicated earlier in the

chapter.


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China's energy security

Without energy, it is impossible to createa modern economy, so energy security isan essential goal for all countries.

The United States manages its securitythrough a variety of means such asdomestic oil and gas sources, industryregulation, the maintenance of a militarypresence in key areas such as the PersianGulf, diplomacy, and the StrategicPetroleum Reserve.


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Absent in the US approach to energysecurity are national oil companies.

The US relies on private companies andmarkets to meet its energy demand.

China's approach to energy security isvery different from that of the UnitedStates and other large developed

countries. As discussed earlier, China has enormous

energy needs.

Although China is currently consuming

less than half as much oil as the United

States, the IEA projects that after 2025,

China will become the world's biggest

importer of oil and gas, while India will

surpass Japan soon after 2020 to take

third place.


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China's government appears not to trustmarkets for its energy needs.

The large Chinese NOCs are the arm of

the government's energy policy, and they

operate very differently than IOCs.

In the future, the IOCs and the Chinese NOCs

will find themselves in competition for energy

reserves and also for government influence in

the resource-rich countries the Chinese NOCs

have already made a number of acquisitions ofoil and gas companies.

Although CNOC's 2005 attempt to take over

Unocal failed, Chinese companies have made oil

and gas acquisitions in Central Asia, Africa,

South America, Canada, and the Gulf of Mexico.
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OPEC has reacted to the increasingdemand from China by increasing theirinvestment in storage and refining assetsin Asia.

Saudi Arabia, the world's biggest crudeexporter, now ships more oil to Chinathan to the United States.' China recentlycompleted a 1,100-mile gas pipeline toconnect to the vast gas reserves ofCentral Asia.

Price, supply, and demand volatility

Although volatile crude oil prices have

been the norm for the past few decades,

many analysts would argue that volatility

has increased because of increased

speculator activity and greater variation in

supply/demand factors.


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Volatility is occurring because of a rangeof factors.

First, there is shifting consumer behaviors

associated with energy consumption.

Events of the past few years have

demonstrated that consumer behavior

can change rapidly.

When the rapid increase in crude pricesoccurred in 2008, consumers in the UnitedStates bought small cars and hybrids atrecord levels.

During the ongoing economic downturn

many consumers have opted for less drivingor public transport.

From these recent events, it would appearthat consumers are much more concernedabout energy prices than in the past.


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3

Second, as we discussed previously, rapidgrowth in energy demand in large emerging

markets has contributed to rising prices.

Unlike that of developed economies, energy

demand in emerging markets is very volatile.

For example, the ups and downs of the

Chinese car market reflect the Chinese

government's interventions in areas such ascar taxes, fuel prices, and sales incentives.

At various times the Chinese

government's steps in to stimulate car

demand and at other times tries to

dampen overheated markets.

The result is that rather than a steady and

predictable market demand for cars, there

is huge variation from month to month

and year to year, which corresponds with

variation in motor fuel demand.


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3

Third, unpredictable governmentbehaviors tied to resource nationalism in

large producing nations such as Venezuela

and Iran are likely to continue.

Often, these nationalistic behaviors lead

to reduced product supply or higher

prices, or both.

Venezuela's reduced production over the

past decade is a case in point: PDVSA in

2010 is much less productive than when

the company was run autonomously by

skilled managers not controlled by the

government.


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Tengiz project

As another example, the Tengiz project in

Kazakhstan operated by Chevron with

partners ExxonMobil and Lukoil is

"periodically squeezed by the Kazakh

government for additional taxes and fines to

prop up the national budget

something that

has become more common during the

recession.

This month [July 2010] ... the Kazakh

authorities announced a new export tax

of $2.73 per barrel, which will cost

Chevron and its partners $1.6 million a

day.

The government also said it was

investigating illegal drilling, which could

bring huge fines."'


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Fourth, uneven development of non-fossil-fuel forms of energy creates uncertainty

in energy markets.

A few years ago in the United States,

ethanol was touted as the fuel that would

"reduce America's dependence on Middle

Eastern oil."

Despite government subsidies, ethanol

(derisively called moonshine by

ExxonMobil CEO Rex Tillerson) is now

viewed as an unsuccessful first generation

biofuel that inefficiently uses valuable

farmland, water, and other resources.


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As the Wall Street Journal wrote,: "Given these realities, the only mystery is

how an industry that produces a fuel that

no one would willingly buy has managed

to be subsidized over four decades at

costs that are higher than anyone ever

imagined".

Without subsidies, ethanol production

would likely disappear.

Further attempts to stimulate demand for

alternative energies will impact energy

markets in unpredictable ways from

supply and price perspectives.

the future of the global oil and gas-1

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