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THE FUTURE OF THE

GLOBAL
OIL AND GAS INDUSTRY

IEA Energy outlook 2009

The world's energy resources are adequate
to meet the projected demand increase
through to 2030 and well beyond....
Fossil Fuels remain the dominant sources of
energy worldwide, accounting for 77% of the
demand increase in 2007-2030....
The worlds remaining resources of natural
gas are easily large enough to cover any
conceivable rate of demand increase through
to 2030 and well beyond.

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The global demand for oil and gas will

continue to rise over the next few decades;
NOCs will continue to expand beyond their
home markets; finding new sources of oil
and gas will get harder and require
innovative new technologies;
investment in non-hydrocarbon energy
sources will continue; the industry will
remain one of the most vital for the global
economy; and, despite the high prices of
recent years, the industry will continue to go
through up-and-down cycles.

History

2011

Projections

100
26%
80

Natural gas 28%

Renewables 11%
8%
(excluding
liquid
biofuels)
8%
Nuclear 9%

60
40

1%
20%

2%
Liquid biofuels
Coal 19%

20

36%

Oil and other liquids 32%

0
1980

1990

2000

2010

2020

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2030

2040

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Here we take a deeper look at the future

and discuss some of the key trends that will
impact the oil and gas industry.
We present our thoughts in three
segments
1. The products,
2. The markets, and
3. The players and their strategies.
As we discuss the trends, we identify
questions that must be considered by the
firms 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 with
regard 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 that
the 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 the
coming decade.

Organisation for Economic Co-operation

and Development

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The OECD peak in demand will be a

function of several factors, including:
mature economies, an aging population that
drives less (especially in Japan and European
countries like Italy and Spain);
greater fuel economy in cars and trucks
(hybrids, advanced diesel engines, a shift to
smaller vehicles);
the introduction of electric cars;
greater commitment to efficiency and
conservation;
and the continued shift away from heating oil
to gas and electric.

1.

2.

3.
4.
5.

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 other

undiscovered technology, innovative ideas
will eventually supplant the need for oil and
gas (if it is algae, the existing downstream
infrastructure will remain viable).
Given the energy density of crude oil and its
ease of transportation and storage, if a viable
alternative liquid form of energy is invented,
it is likely that the IOCs of today will
continue to dominate the private sector side
of the energy business.

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At some point, the rationale for NOCs

will 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 from

onshore wells in countries that are
geographically, culturally, and politically
distant from consuming nations.
Assuming security issues are manageable,
Iraq will become a much more important
oil producer.
In Africa, historically unstable countries
like the Democratic Republic of the
Congo will see exploration activity.

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Most of the new discoveries will be in

offshore 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 will
likely 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, the

risks 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.

2.

3.

As access to oil reserves becomes more

difficult, E&P companies have shifted
resources to gas.
Mega LNG projects require huge amounts
of capital, technology, and project
management expertise all of which the
supermajors can provide.
Gas is a cleaner burning energy and there
is an ongoing shift from coal to natural gas
as 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 and

energy demand grows, gas prices should rise
and the megaprojects should pay off.
If prices stay flat, the supermajors could find
themselves with depressed returns on
capital employed for many years.
There is also the possibility that more GTL
projects will be developed.
If GTL costs become competitive relative to
oil, there could be a surge of interest in new
developments.

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 require

different skills relative to onshore and offshore
conventional gas projects.
Since shale oil wells cost as little as a few million
dollars each, gas producers have much more
flexibility in matching production with demand.
They can drill wells when demand increases and
pull back during down cycles.
At the other end of the spectrum, megaprojects
involving multi-billion dollar LNG trains cannot
easily 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 to

the 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 and

renewable/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 Energy

Agency (IEA) under its 450 Scenario
(greenhouse gas emissions stabilizing at
450 parts per million (ppm) of CO2equivalent) see fossil fuels peaking in use
by 2020.
Under this scenario, by 2030 zero-carbon
fuels will make up a third of the world's
primary sources of energy demand.

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A significant increase in the use of

renewables 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, energyefficiency measures in industry and
buildings, and next-generation motor
vehicles

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we in Russia are well familiar with such a

mindset: 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 in

renewable energy will not happen because
of governments.
Governments may help in establishing basic
conditions but innovative technologies have
always come from the hard work and
pioneering genius of entrepreneurs.
One new energy company started by a
couple of entrepreneurs is Sapphire Energy, a
company that recruited its president from
BP

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The Markets

Growing demand for energy in emerging

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

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Although most of China's energy

consumption 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 significant

increases in energy demand.

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If China and India continue to experience 5%

to 10% annual economic growth, their
demand for energy will grow at similar or
higher rates.
Most other emerging market economies are
also growing and they will need more energy.
Although energy users will become more
efficient, as personal incomes grow there will
be growing demand for automobiles, air
travel, 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 create
a modern economy, so energy security is
an essential goal for all countries.
The United States manages its security
through a variety of means such as
domestic oil and gas sources, industry
regulation, the maintenance of a military
presence in key areas such as the Persian
Gulf, diplomacy, and the Strategic
Petroleum Reserve.

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Absent in the US approach to energy

security are national oil companies.
The US relies on private companies and
markets to meet its energy demand.
China's approach to energy security is
very different from that of the United
States 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 trust

markets 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 of
oil 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 increasing

demand from China by increasing their
investment in storage and refining assets
in Asia.
Saudi Arabia, the world's biggest crude
exporter, now ships more oil to China
than to the United States.' China recently
completed a 1,100-mile gas pipeline to
connect to the vast gas reserves of
Central 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 range

of 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 prices

occurred in 2008, consumers in the United
States bought small cars and hybrids at
record levels.
During the ongoing economic downturn
many consumers have opted for less driving
or public transport.
From these recent events, it would appear
that consumers are much more concerned
about energy prices than in the past.

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Second, as we discussed previously, rapid

growth 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 as
car 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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Third, unpredictable government

behaviors 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 budgetsomething 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-fossilfuel 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.

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