A new market with new rules confronts big oil companies

By Benjamin Hulac | 06/12/2015 08:33 AM EDT

To a pair of number crunchers employed by two top oil and gas majors, key energy producing and consuming nations stepped into an energy market with new roles last year, upending the global energy trade as a result.

To a pair of number crunchers employed by two top oil and gas majors, key energy producing and consuming nations stepped into an energy market with new roles last year, upending the global energy trade as a result.

In back-to-back speeches delivered yesterday and Wednesday by the chief economists of Statoil ASA and BP PLC at the Center for Strategic and International Studies, both men said coal is the slowest-growing primary energy stock while renewables are expanding at the fastest rate of all sources.

They also said falling demand in Asia and an oil surplus led to the halving of oil prices since last summer.


"We’re either depressed or euphoric," Eirik Wærness, the Statoil economist, said of the "bipolar" oil and gas industry while presenting the company’s energy forecast to 2040.

"There’s no better cure for low oil prices than low oil prices," Wærness said. "It’s a history of volatility and change," he added of rising and falling fossil fuel values. "That’s going to continue."

Oil prices at $50 per barrel or $140 per barrel are not sustainable, Wærness said, telling the audience that shale oil output is on the steep part of its rise and cannot last forever.

"What is happening now will fundamentally tighten the market," he said.

Sharply influenced by an oil and gas glut in U.S. shale territories, the decision from Saudi Arabia and other Persian Gulf nations to keep pumping oil, and slackening demand from China, 2014 was a turbulent year. Wærness said those three developments surprised Statoil, which is majority owned by the Norwegian government.

Last Friday, the 12-nation bloc of the Organization of the Petroleum Exporting Countries (OPEC) voted to maintain its crude oil output targets rather than cut back production. Iraq, Saudi Arabia and the United Arab Emirates, which collectively generate about one-fifth of global crude oil on the market, each notched record output totals in May.

A year ago, there were 2,074 active rigs in North America and 1,860 in the United States, according to Baker Hughes Inc. statistics. Those figures had dropped to 984 and 868, respectively, as of last week. Employment in the U.S. oil and gas extraction business peaked at 167,000 in late 2008 and again in October last year with 202,000 workers, according to the Bureau of Labor Statistics (BLS).

By March, oil and gas fields had shed about 4,000 jobs, and the BLS estimates that another 4,000 workers have lost their jobs through May.

Global energy consumption relaxed to 0.9 percent last year, compared to about double that in 2013, marking the mildest year since the late 1990s, outside of the years following the financial crisis of 2008, BP’s chief economist, Spencer Dale, said yesterday.

Energy demand internationally in 2014 was slower than the average demand over the last decade in every region other than North America, which grew by 0.9 percent, and Africa, which surged by 2.8 percent.

"Demand wasn’t exceptional; supply was quite exceptional," Dale said. "This was a non-OPEC, North American supply story."

New power brokers

Last year saw a shift in the world’s energy power brokers, as the United States became the world’s top oil producer for the first time since 1975, vaulting over Russia and Saudi Arabia. Canada and Brazil produced record levels of oil last year also.

Since 2007, when the United States imported about 30 percent of its energy, American suppliers have come a long way toward self-reliance.

Seven years later, domestic production makes up about 90 percent of the country’s energy needs. And the United States relinquished its spot at the world’s biggest oil importer — net oil imports for 2014 were lower than half 2005 peak levels — to the Chinese.

"So we truly are witnessing a changing of the guard in terms of global energy suppliers," Dale said.

In the European Union, appetite for imported energy fell by almost 4 percent last year, while a serious slowdown in natural gas demand in the region dragged down global gas markets. Demand fell by nearly 12 percent among E.U. nations, the biggest drop in roughly two decades, according to BP’s annual review.

"Turns out there was an exceptionally mild winter," Dale said. Gas imports from Russia to Europe dropped by 9 percent also, the largest decline recorded, he said. "But they fell pretty much in lockstep with demand."

In the global energy slowdown of 2014, carbon emissions slowed, too.

On average, emissions worldwide have risen 2 percent each year in the last decade, while energy production has grown less carbon-centric. Last year, emissions rose just half a percent.

"This is not a GDP-driven story," Dale said. "This is an energy-intensity-driven story."

And the world’s non-fossil energy options are holding their market share, about 14 percent of the planet’s primary energy sources, Dale said.

To Wærness, natural gas is a pillar vital to hitting the often-mentioned 2-degree-Celsius-by-2050 temperature goal.

Heading toward a price on carbon?

"We need more gas in the 2-degree scenario than today," he said. Energy companies can "relax" and step back from and invest less in coal, Wærness added, but must drill for more oil and gas pockets to meet rising demand from emerging economies and "counterbalance" coal emissions.

And electric vehicles cannot address root climate change issues, he asserted, using China and Latvia — which he said generates all of its electricity by burning coal — as examples of how challenging electrifying transportation sectors will be.

"You have to decarbonize the power sector to have this policy make sense," Wærness said.

The Norwegian parliament voted earlier this month to divest its $900 billion sovereign investment fund, accumulated largely due to the country’s oil reserves, of some coal firms and coal-heavy power operators. The fund directors will implement the policy next year (ClimateWire, June 8).

"When we invested in renewables," Dale said of BP when asked about the company’s plans to invest outside of fossil fuels, "we assumed there would be a price on carbon."

But, he said, those carbon-pricing mechanisms have never been significantly established.

"If you set the right carbon price you sort of unleash market forces," Dale said. The role of oil and other energy companies would be to respond to the "right incentives," he said.