Oct
21

Report Warns of Capex Crisis for Oil Majors

 
Crude oil prices tumbled this month on the heels of historically high U.S. oil production and a downwardly revised global energy demand outlook. The conventional economic wisdom is that the market requires high oil prices for international oil companies to break-even. High prices, after all, boost the profitability of expensive, unconventional ventures. A new report finds that, in addition, high prices impact long-term investments in unconventional projects and heighten the oil majors’ risk of stranded assets. Kepler Cheuvreux, a research organization, contends that market conditions evolve to shift supply from more expensive energy sources to less expensive ones. Over time, they say, high oil prices encourage investment in alternative energy research and development, and lead to a decline in the cost of those sources over the long term. For oil majors, this means that capital-intensive unconventional projects, like the Canadian oil sands, or deepwater and Arctic drilling, may lose profitability, and actually become financial risks. Lead author and researcher Mark Lewis writes, “[F]ar from vouchsafing the future profitability of the higher-cost, high-carbon investments that the oil majors might make over the next decade, sustained high oil prices could actually lead to such investments becoming stranded beyond 2025 […]” as costs continue to drop for other energy sources. Lewis and colleagues add that, over time, oil prices will gradually rise. Despite current lows, they forecast prices to reach $120-125 per barrel (bbl) in real dollars by 2020, $15-20/bbl more than the International Energy Agency’s (IEA) real and nominal projections under the agency’s base-case scenario. The authors add that trends in production, exports and the prices of crude oil since 2005—the onset of the U.S. energy boom—show “involuntary” cuts to conventional production. This is because prices were significantly higher between 2006 and 2013 than they were between 2003 and 2005, when conventional production was on the rise. “The very fact that the world has come to rely so much on unconventional production such as US [light tight oil (LTO)] and Canadian oil sands in the last five years or so is itself very revealing as it would indicate that the cheap and easy sources of conventional crude oil are now largely gone, with what remains primarily to be found in OPEC countries of the Middle East,” they write. What will be left in mostly OECD countries, particularly in the U.S. and Canada, are aging conventional wells. Lewis writes that the Energy Information Administration expects LTO production to peak at 4.8 million barrels per day (mbd) between 2018 and 2021 and then decline to 3.7 mbd by 2035 (Chart 15).

The rise in unconventional oil has culminated in a “major capex crisis” for the oil majors, the group finds. Since 2000, annual upstream oil and gas industry investment rose 180 percent, from $250 billion in 2000 to $700 billion in 2012 (Chart 36). These findings may be intuitive given the rapid expansion of unconventional drilling in the U.S. during that period (e.g., offshore, shale), but the results are nonetheless interesting. First, the researchers point out there has been a threefold increase in industrial capital expenditures since 2000, but comparatively low supply to show for it: the supply of petroleum liquids and bio-fuels increased only 16 percent (12.4 mbd); crude oil supply rose only 11 percent (7.4 mbd). Second, capital outlays have risen faster than prices—90 percent to 75 percent, respectively. The result of these factors, the authors say, is diminishing returns of upstream capital expenditures given incremental supply generated since 2005.

Using IEA data, the report draws attention to the fact that oil fields already in production will account for 71 percent of total crude oil production between 2013 and 2025, but only 43 percent of crude production thereafter from 2025 to 2036 (Charts 52 and 53). Much of the new production will be picked up by unconventional wells, like horizontal fracturing in shale rock.

In the long run, as consumer adoption of electric vehicles (EVs) accelerates and the price to produce other forms of energy declines, the report argues oil will struggle to stay viable. In its World Energy Outlook for 2013, the IEA expects EV sales to reach 500,000 vehicles by 2020, resulting in an oil savings of 35,000 barrels per day (bbd) in 2020, and 235,000 bbd in 2035. However, record EV sales in recent months suggest these may be conservative estimates. “Against this uncertain backdrop […] we think the majors should be asking themselves whether it makes sense to replace lost output from their existing producing assets on a barrel-for-barrel basis, or whether in fact they should be reducing their capital allocation to higher-cost new projects (i.e. those requiring a price of > $100/bbl)[…],” investing this available money into a wider energy portfolio. If the oil majors stick with petroleum-based capital expenditure projects in the coming decades, Lewis and colleagues conclude, they may be trapped with significant sunk costs in unconventional drilling infrastructure—irrespective of the conventional economic wisdom. On the one hand, falling oil prices brought about by lower demand would create less of a need for these resources. One the other, rising oil prices brought about by constrained supply would strap the majors to expensive projects for diminishing returns. In the end, a diverse portfolio of multiple energy sources may prove to be the best option heading into the future.
Oct
17

Collaborative Solutions: Energy Security in North America

 

Earlier today, Admiral Dennis C. Blair (ret.) former Director of National Intelligence and Commander in Chief of U.S. Pacific Command, spoke before a packed lunchtime crowd at this year’s Chicago Council on Global Affairs U.S.-Canada Energy Summit. His remarks, “Shared Challenges, Collaborate Solutions: Energy Security in North America,” spoke to the long tradition of U.S.-Canadian cooperation, especially on energy issues, ...

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Oct
15

Are We More Energy Secure? Then and Now (Part 2 of 2)

 

In part of one of this piece, we looked at ways in which the United States is more energy secure than ten years ago. Now, it’s worth looking at ways in which our energy security has failed to improve, or in some cases, worsened. 1) Oil’s Share of Transportation Fuel One of the most glaring vulnerabilities in our energy security is the fact ...

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Oct
10

Tesla Pushes Forward on Autonomous Vehicles

 

  Last night, Tesla Motors CEO Elon Musk debuted the automaker’s newest product, an update to the Model S with new features that include all wheel drive (AWD), 0-60 acceleration in just over 3 seconds, and some highly anticipated autonomous driving features. The new AWD edition is recognizable from the addition of a “D” to the standard model names (60D, 85D, ...

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Oct
10

How do Consumers Respond to Falling Gasoline Prices?

 

Last month, as gas prices dropped by nearly 15 cents nationwide, consumers responded by purchasing less fuel-efficient vehicles. This trend became evident with the help of two measures. First, sales-weighted new vehicle fuel economy dropped noticeably after several months of impressive gains. According to data collected by Michal Svitak and Brendan Scoette at the University of Michigan’s Transportation Research Institute, the ...

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