The Very Real Possibility Of Peak Oil Supply
Three months ago, the British oil giant BP Plc. (NYSE: BP) sent shock waves across the oil and gas sector after it became known that demand for premium oil is behind us. In the company's 2020 Energy Outlook, CEO Bernard Looney pledged that BP would increase its renewable energy spending twenty-fold to $ 5 billion a year by 2030 and "... not enter new countries for oil and gas exploration" will.
This announcement was a little shocking as BP has been aggressive in exploring new oil and gas borders.
The investment universe appears to be in line with BP's sentiment, with the oil and gas sector consistently emerging as the worst performer over the past decade. The sector suffered another blow after the world's largest investor-owned oil company ExxonMobil (NYSE: XOM) was banned from the Dow Jones Industrial Average in August and Chevron (NYSE: CVX) as the sector's sole agent in the industry remained behind The Index.
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Meanwhile, oil prices appear to be stuck in the mid-1940s and there is little prospect of rising until the mid-1950s, which most shale producers need to drill profitably.
A deeper look at the global oil and gas outlook suggests that peak oil supply, rather than peak oil demand, is likely to dominate headlines as the quarters progress.
Peak oil demand
When many analysts talk about peak oil, they usually refer to the point in time when global oil demand will enter a phase of terminal and irreversible decline.
That point has come and gone, according to BP, and oil demand is likely to fall by at least 10% over the current decade and up to 50% over the next two years. BP notes that in the past, energy demand has risen steadily with few interruptions in line with global economic growth. However, the COVID-19 crisis and the increased climate protection measures could have permanently changed this playbook.
BP has modeled three possible scenarios for the future of global fuel and electricity demand: Business as Usual, Rapid Transition and Net-Zero. Here's the kicker: BP says that even in the most optimistic scenario where energy policy moves as fast as it does today (business as usual), oil demand will still decline - only at a later date and at a slower pace than when compared to other two scenarios.
The oil bulls can comfort themselves, however, that BP sees in the business-as-usual scenario that oil demand will remain at 97 to 98 million barrels per day through 2030, before dropping to 94 million barrels per day in 2040 and finally in three decades 89 million barrels a day. This corresponds to a demand loss of less than 1% per year until 2050.
However, under the other two scenarios, which include aggressive government policies to achieve net-zero status by 2050, as well as carbon prices and other measures to limit global warming, things could be very different.
In the Rapid Transition scenario (moderately aggressive), BP sees a 10% decline in oil demand by 2030 and almost 15% below net zero (most aggressive).
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In other words, the decline in oil demand will be catastrophic for the industry in any scenario other than business-as-usual for the next decade.
Fortunately, this is the scenario that is likely to dominate for the next decade.
David Blackmon, a Texas-based independent energy analyst / consultant, told Forbes that many analysts are skeptical of BP's dire prospects. In fact, Blackmon says a "Business as Usual" scenario is the most likely path for now, given the time it may take for the global economy to recover from Covid-19 and the trillions of dollars it takes to implement it the other would require two cases.
Additionally, it's important to note that BP made these predictions before Covid-19 vaccines entered the fray. With several viable vaccine candidates now on the scene, there is a good chance the global economy will recover faster than expected, and thus oil demand will recover faster than previous estimates.
Top oil supply
Although seldom discussed seriously, peak oil supply remains a definite possibility for the next few years.
In the past, the supply-side “peak oil” theory has mostly been found to be wrong, largely because its proponents invariably underestimated the vast amount of resources yet to be discovered. In recent years, the demand-side “peak oil” theory has always managed to overestimate the ability of renewable energy sources and electric vehicles to displace fossil fuels.
Then, of course, few could have predicted the explosive growth of US shale, which increased global supplies by 13 million barrels per day from 1-2 million b / d in just a decade.
It is ironic that the shale crisis is likely to be responsible for triggering the peak oil supply.
In an excellent statement, IHS Vice Chairman Markit Dan Yergin notes that it is almost inevitable that slate production will reverse and decline due to drastic investment cuts and only slowly recover later. Shale oil wells sink with an exceptionally fast clip and therefore require constant drilling to replenish the lost supply. Though the number of U.S. drilling rigs appears to be stabilizing thanks to oil prices that plummeted from the low 30s to the mid 40s, the most recent number of 320 remains well below the prior-year figure of 802.
Although the OPEC + nations currently have 8 million barrels of oil per day in reserve capacity, current price levels don't support much drilling at all, and the additional oil may just be enough to meet the shortage of US shale.
By Alex Kimani for Oilprice.com
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