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What The Oil And Gas Industry Is Not Telling Investors

Tyler Durden's picture




 

Submitted by Nick Cunningham via OilPrice.com,

Oil prices crashed because of too much supply, but will rebound as production shrinks and demand rises. But what if long-term demand for oil ends up being sharply lower than what the oil industry believes?

That is the subject of a new report from The Carbon Tracker Initiative, which looks at a range of scenarios that could blow up oil industry projections for long-term oil demand.

Historically, Carbon Tracker says, energy demand has been driven by population, economic growth, and the efficiency (or inefficiency) of energy-using technologies. Carbon Tracker looks at a couple possible future scenarios in which those parameters are altered, resulting in dramatically lower rates of oil consumption.

Carbon Tracker has been a pioneer in the concept of “stranded assets,” the notion that fossil fuel assets will lose their value as the world moves to restrict carbon emissions. If an oil field cannot be produced profitably in a carbon-constrained world – or cannot legally be produced because of certain regulations – then it ceases to have value. That puts investors’ dollars at risk, a risk that financial markets have not fully grappled with.

However, in a new report, Carbon Tracker expands upon the possible scenarios in which oil demand may not live up to industry predictions.

For example, if the world population hits only 8.3 billion by 2050 instead of the 9.7 billion figure typically cited by the UN, fossil fuel consumption could end up being 17 percent lower in 2050 than the oil industry thinks. Coal would be affected the most, with 25 percent reduction in demand compared to the business-as-usual case.

How about GDP growth? The expansion of the global economy is pivotal to energy consumption. The industry typically bakes in a GDP growth rate of 2.8 to 3.6 percent per year into its forecasts. But these figures could be on the high end, especially since so much hinges on the ongoing blistering growth from China. But, using BP’s pessimistic GDP scenario in which China and India only grow at 4 percent per year, global energy demand could be 8.5 percent lower in 2035 than the business-as-usual case.

 

Perhaps more threatening to future oil demand are global policies to ratchet down greenhouse gas emissions, as previously touched upon. Although international negotiations have largely failed to halt the growth of carbon emissions, a significant effort to zero out carbon over the long-term would necessarily cut deeply into demand. Industry projections largely ignore this possibility, as industry estimates for fossil fuel demand in the future would likely lead to average global warming of 4 to 6 degrees Celsius, exceeding the stated goal of capping warming at 2 degrees. More importantly, industry projections for fossil fuel use already exceed the totals that would result if the carbon reduction goals already laid out by countries heading into Paris are implemented. Caps on emissions would upend the entire business model of the oil industry.

Carbon Tracker looks at a few other scenarios, including the possibility that renewable energy could make cost reductions and deployment much greater than the oil industry thinks. Indeed, energy prognosticators like the IEA consistently underestimate the market penetration of solar PV and wind. Actual deployment wildly exceeds every projection that the IEA publishes. It is not hard to see oil industry projections off the mark, undone by falling costs and rapid deployment of solar and wind.

Moreover, the combination of energy storage and renewable energy could transform power markets, solving the problem of intermittent energy. Battery storage continues to get cheaper, another trend that the oil industry could be underestimating. Electricity market transformation would also help scale up battery manufacturing, which in turn would reduce the cost of electric vehicles.

Take Toyota’s recent announcement that it will target a 90 percent reduction in greenhouse gas emissions from its vehicles by 2050 by developing fuel cell vehicles. There is a long way to go before such a scenario becomes viable, but the announcement should is a shot across the bow for the oil industry.

In short, Carbon Tracker concludes, there are very real threats to the business models of oil companies, threats that need to be explained to investors. Right now, those threats are not being taken seriously.

 

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Mon, 11/02/2015 - 20:00 | 6741803 Tallest Skil
Tallest Skil's picture

Those responsible for creating the idea of a "carbon tax" need to be executed for crimes against humanity.

Mon, 11/02/2015 - 20:08 | 6741851 Hohum
Hohum's picture

And your opponents think the same of you.  Interesting world.

Mon, 11/02/2015 - 20:29 | 6741919 CrazyCooter
CrazyCooter's picture

I reject the premise of the OP.

The last year we discovered the most new oil was 1965. The old fields aren't being replaced by the same "caliber" of new fields, which is why deep water, shale, and the other stuff is what oil companies invest in.

One can't just take a ruler and expect to hit oil production quotas years/decades into the future with this sort of fundamental aspect. That is to say, they are wiggling the ruler around a little this way, a little that way, instead of realizing that the fields that supply the world today lose on average 5% to 7% of their production, year after year, and that is ideal (lots of capital spent to hit those number - or it gets much worse very fast). Run that decline out a couple decades and then tell me where all the replacement oil production is going to come from.

Regards,

Cooter

Mon, 11/02/2015 - 21:08 | 6742082 new game
new game's picture

answer: new technologies when oil hit 150-200/bbl.

Mon, 11/02/2015 - 23:52 | 6742760 techpriest
techpriest's picture

Look at it this way: the USB stick saved more trees than Greenpeace.

Tue, 11/03/2015 - 03:37 | 6743059 conscious being
conscious being's picture

Re. New technologies. Keshe says [I think] we don't really need fossil fuels anymore.

Tue, 11/03/2015 - 09:42 | 6743419 detached.amusement
detached.amusement's picture

been looking into it but its still not convincingly viable, go on the forum and everyone's still bitching about having paid out and never received their product, and the ones that have built them have these nice little spinning devices to look at.

Mon, 11/02/2015 - 21:11 | 6742091 57-71
57-71's picture

Interesting that Shell (Royal DutchShell) wrote off $2.1 billion in the 3Q 15 for a dry hole in the Arctic.

That is a pile of cash for 1 well. And no additional oil reserves.

Tue, 11/03/2015 - 06:09 | 6743156 Antifaschistische
Antifaschistische's picture

Much of the new world demand has come from China.  That demand has come from million of first-time-car-buyers who have lived their live dreaming of owning a car.

Like is human nature, that dream may in fact wear off as those drivers accept that a) car ownership isn't really all that great  2) smog is terrible, and 3) driving a car in Chinese cities, though it may feel prestegious, it is not remotely convenient (at best) and is actually silly in most cases.  

There may be a demand contraction as all these cars approach end of life in the next 2-5 years since China has experiences peak smog, peak city road and peak parking spaces all at the same time.

against this hypothesis:  auto/oil oligarchs making billions, draining the savings of Chinese citizens by pushing the car/gas dream.

Tue, 11/03/2015 - 13:28 | 6744458 welostyourgold
welostyourgold's picture

Picture poor people, on treadmills & bicycles, running generators.  You want to eat – 4 hours on the bike…

Mon, 11/02/2015 - 20:41 | 6741972 sun tzu
sun tzu's picture

Except he's not trying to steal from his opponents, who are funded by globalist bankers

Mon, 11/02/2015 - 20:57 | 6742049 outlaw.guru
outlaw.guru's picture

It's funny how anti carbon tax is the US public, when the entire idea of carbon tax was developed there as a capitalist solution to a global freerider problem. I am not saying it is the best. Just saying a totalitarian country could simply order factory shutdowns, mandatory catalysts, CO2 injection/liquification, etc.

Carbon tax scheme however is a complete opposite of that as it introduces a capitalistic system to deal with environmental issues. Just don't say current capitalism is bad and big banks are going to take the cream (it's redundant after considering last decade). Not going to get into environment, but if you fart you expect the smell. Hence anyone not beliving in anthropogenic effects on climate does not believe their farts smell.

Tue, 11/03/2015 - 09:45 | 6743430 detached.amusement
detached.amusement's picture

its funny how the entire rationale for a carbon tax rests upon  statistics so butchered so as to be a completely fake not-even-representation of climate response

Tue, 11/03/2015 - 14:24 | 6744721 outlaw.guru
outlaw.guru's picture

I agree as I have quite a bit of knowledge there. But it can also help. I know of a facility that has the highest emissions in the country, but they generate carbon credits instead of having to buy them. The reason is they installed a massive cogeneration unit (heat + electricity from same fuel) which decreased their intensity (ghg/production) from base years. At the same time another facility which produces a fraction of ghgs had to buy credits of 1m because they cannot produce more while polluting less in a plant made in 1970s in which no one wants to invest more.

Mon, 11/02/2015 - 21:50 | 6742278 Stuck on Zero
Stuck on Zero's picture

Whoever came up with the concept of a "tax" needs to be executed for crimes against humanity.

Mon, 11/02/2015 - 20:01 | 6741805 Hohum
Hohum's picture

Picture of a sunset is apropos.

Mon, 11/02/2015 - 20:07 | 6741842 adr
adr's picture

I guess oil companies never made a dime over the 100 years oil was below $30 a barrel.

When oil went above $30, the world economy fell apart. The only thing that kept it going was funny money from central banks creating inventory that was never consumed by anyone in a vain attempt to goose stocks.

That statement is pretty much as solid a fact as can be.

Mon, 11/02/2015 - 20:10 | 6741858 Hohum
Hohum's picture

So you subscribe to the theory that the cost of extraction never rises.  Capital expenditures since 2000 suggest otherwise.  Google Steve Kopits.

Mon, 11/02/2015 - 20:16 | 6741879 BarnacleBill
BarnacleBill's picture

"I guess oil companies never made a dime over the 100 years oil was below $30 a barrel."

No, that comment doesn't make sense. The value of $30 has been different in almost every year of the last 100 years. Inflation changes the purchasing power; only the name "dollar" remains the same. It's a trick - or a fraud, if you'd rather.

(I'm an accountant; I know these things!)

Mon, 11/02/2015 - 20:42 | 6741981 sun tzu
sun tzu's picture

Coca Cola should be able to sell a bottle of coke for 5 cents since they used to be profitable selling at 5 cents. 

Mon, 11/02/2015 - 20:11 | 6741863 TuPhat
TuPhat's picture

Not another global warming fear mongering article.  I've had enough of that crap.

Mon, 11/02/2015 - 21:55 | 6742308 t0mmyBerg
t0mmyBerg's picture

It seems to be the wildfire meme recently, this stranded oil assets bs.  Ambrose Evans-Pritchard has written a couple of times about it and I just read another article about it and the "huge" demand for responsible asset investing and fund managers divesting oil assets yada yada yada earlier this evening. 

All I can say is - retards.

Mon, 11/02/2015 - 20:41 | 6741977 cougar_w
cougar_w's picture

Nobody is doing this right. The worst-case scenarios are way too optimistic. Nobody is reporting what they really think or how the models are actually selected, everyone (even the scientists) are painting a rosy picture to avoid being labeled "alarmist". Alarmists don't get grants, don't get invited to conferences, don't get speaking fees, aren't invited to chair academic departments or advise corporations. Nope, if you want to play in the BAU world as a scientist or academic you need to keep your yap shut and your opinions to yourself. As a direct consequence the most dire projections are laughably optimistic and may as well have been funded by the energy conglomerates.

But they are only fooling themselves. There will be no BAU. Not that and not anything close to it. Some point in the next 5 to 10 years people are going to completely lose their collective shit -- I won't guess what the trigger will be, but they will lapse into utter terror -- and start demanding immediate change and anyone not seen as fetching and stepping to the new tune will probably simply be dragged into the center of town and set on fire. The pendulum will do what it always does after a period of enforced confidence and swing too hard the other way, where the mob -- in desperate bargain with the devil --  will enforce a wicked reassessment of everything related to carbon.

Mon, 11/02/2015 - 21:12 | 6742095 new game
new game's picture

it is already to late. war of the worlds will over oil; cue ME. and the spillover,ha...

Mon, 11/02/2015 - 22:14 | 6742385 4shzl
4shzl's picture

Wrong. The war of the world will be over water and arable land.

Mon, 11/02/2015 - 20:46 | 6741995 DOT
DOT's picture

Lacks substance of a real "projection" -which RCP was used for the 2040 and  2oC values ? The models of econometrics are tenuous, the models of Climate are worse and these are used to provide a regulatory framework. It really fuckin' sucks when an econometric projection is built on top of a Climate model output.

Tue, 11/03/2015 - 09:47 | 6743441 detached.amusement
detached.amusement's picture

but it all makes sense from a resource extraction perspective.  (extracting the resources of the populace, that is)

Mon, 11/02/2015 - 20:53 | 6742030 MalteseFalcon
MalteseFalcon's picture

Did the industry tell investors that the oil is all gone?

Mon, 11/02/2015 - 21:09 | 6742086 Niall Of The Ni...
Niall Of The Nine Hostages's picture

So what's the joke? Rainbow and unicorn fart power will save our pipedreams from big bad Vladimir Putin? 

We literally eat oil---most fertilizers these days are made with oil and gas. Growing your food in cowshit hit its limits as a model for agriculture long ago.

Back in reality we have two choices when Saudi runs out of oil in 15 years (max).

1. Give Russia a fair price for her oil, allow her to become the immensely rich country she would have been decades ago were it not for communism, and stop whining about not being able to get a new iTurd every year or strawberries in January because shipping actually costs money.

2. Or starve and freeze to death, cursing the darkness with your last breath. Choice is ours.

Mon, 11/02/2015 - 22:19 | 6742406 4shzl
4shzl's picture

Average calorie loss from petroleum inputs (fertilizer, transportation, packaging, and storage) to food = 10 to 1.  AKA entropy.  Regardless of how much money you ship to Russia or the ME, this model is not sustainable.

Mon, 11/02/2015 - 23:59 | 6742774 techpriest
techpriest's picture

If the oil price rises substantially, in real terms, for market or regulatory reasons, everything will be forced to change in order to stay "sustainable."

- If you want to live in the 'burbs you will have to take a train, assuming you still want to live there since everyone's downtown.
- More people will be living in smaller spaces, i.e. condos. Homesteading will again not be as easy as living in a commute-distance suburb.
- If you do homestead, you will be growing more of your own food
- Finally, less cheap energy means lower available real revenue to tax. Governments will get smaller, though with AGW they are hoping to maintain power by starting up a cult of true believers to do the work for them.

Tue, 11/03/2015 - 11:30 | 6743889 sam site
sam site's picture

 

Also what about cold fusion energy innovation that replaces oil and gas combustion. 

What about the energy related 4000 of the 6,125 patents under "National Security" lockdown.  If these get out - look out for Exxon.

What about the global oil demand decline that's going to accompany the de-population as the paper currency debt bubble unwinds.  The population bubble has been blown by the debt bubble and both are about to out-gas.

Big Changes coming and I would not be betting on oil and gas to expand.  There's a good chance what little energy demand survives might be replaced by innovation that gets out in the upcoming chaos.  

Investing in food and water would be a better bet.

 

 

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