The Fuse

Industry Panel Emphasizes Continued Global Energy Demand Growth; Investment Needs

by Matt Piotrowski | June 20, 2018

Speakers at this year’s OPEC Seminar stressed that oil demand will continue to grow and the global oil industry will have to pour trillions into investment to meet this growth.

In a panel entitled “Sustainable Global Energy Future,” Daniel Yergin of IHS Markit pointed out that peak oil demand has faded as a topic. With demand expected to continue to rise, the industry needs to increase capital expenditures after a sharp decline from 2014-16. When prices were high throughout the first half of this decade, a number of analysts argued that alternatives and increased fuel efficiency would stifle demand growth. Now, however, global oil demand is growing by about 1.5 percent annually. Yet, increasing trade tensions, higher interest rates in the United States, and desynchronized economic growth could negatively affect demand.

“We aren’t going to plan on $70-80. We are going to exhibit financial discipline.”

Despite uncertainty that demand will continue to rise at the current pace, the world still needs a lot of oil. BP CEO Bob Dudley said that in “only 22 years we’ll see demand growth of another China or EU coming online.” He reiterated that the global oil industry needs investment, but then said: “We aren’t going to plan on $70-80. We are going to exhibit financial discipline.”

When the topic of trade barriers arose, Dudley said that “we are in uncharted territory,” but “demand will remain. The world will somehow adjust around these things.”

Total’s CEO Patrick Pouyanne said that trade barriers represent another risk to oil prices and highlighted that the market needs to keep a long-term perspective regarding investment. “In 2017, less than one year ago, oil was $42. Today it’s $75…this is huge volatility. We need to continue to work hard to produce low cost oil, but you also have elements of geopolitics which have contributed to high prices.”

He pointed out the dangers of underinvestment and supply outages, as a one percent imbalance could create volatility of 30 percent. “We are facing inherent instability,” he said.

Eni’s Claudio Descalzi also stressed the need for investment in coming years and the dilemma the industry is now facing. What happened 4 years ago—we were investing $800 billion, but now we are investing 50 percent less.”

Besides meeting future demand growth, oil companies have to invest enough capital just to fight depletion, which he estimates at 6 million barrels per day every year. In order to return to pre-2014 investment levels, the industry needs to rehire workers after losing a massive 600,000 jobs in just two years. He reiterated the difficulty of investing in today’s environment because of oil price instability and increasing geopolitical risks.

The industry does not need $80-$100 oil to meet its investment goals, but many companies can’t survive at $40-$50, he said.

Sheffield expect the Permian to reach 7-8 Mbd near the end of next decade, and for total U.S. production to eventually hit 15 Mbd.

In the one area where this is robust investment—U.S. shale fields in the Permian Basin—other problems have emerged that should delay getting oil to the market. Scott Sheffield, Executive Chairman of the Board at U.S. independent Pioneer, says the Permian will rise by 4 Mbd in the coming years, but production will flatten as from September 2018 to the same month in 2019 due to pipeline and labor constraints. The area needs pipeline capacity to reach 3.5 Mbd. Sheffield expect the Permian to reach 7-8 Mbd near the end of next decade, and for total U.S. production to eventually hit 15 Mbd.

Dudley said that US, with its industry reacting to market conditions, will “keep the shock absorber on high oil prices.”

Even so, speakers during the Seminar argued that even with shale’s extraordinary growth, the world oil market needs large future investment. In the U.S., where discussion of “energy independence” has grown because of shale’s rise, consumers are still vulnerable to the interconnected global market, and will continue to be.