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In March, Houston, Texas, the heart of the US oil industry, for the 37th time played host to CERAWeek, the largest global energy forum. The subject of this year’s meeting was ‘Tipping Point: Strategies for a New Energy Future’, which very well reflects the uncertainty faced by the energy sector at large, from oil and gas producers to power generation companies and automakers.
CERAWeek’s agenda covered many issues: from the uncertainty regarding spot markets and geopolitics to the long-term effects of technology, environmental protection programme, investments, infrastructure, as well as the skills and workforce of tomorrow.
A few words should be said about the history of the event itself, in which PKN ORLEN representatives have been actively involved for more than 15 years now. The conference was named after Cambridge Energy Research Associates (CERA), an energy research and consulting firm founded in 1983 by Daniel Yergin and James Rosenfield. The firm quickly became known for its critical insight into and independent analysis of energy markets, geopolitics, industry trends, technology and strategy. The conference founder and leader is the co-founder of CERA, Daniel Yergin, PhD, American author, speaker, and economic historian best known for his Pulitzer Prize-winning book The Prize: The Epic Quest for Oil, Money, and Power (1992). His The Quest: Energy, Security, and the Remaking of the Modern World and The Commanding Heights have been translated into Polish; the latter was published under the patronage of PKN ORLEN as CERA’s long-standing partner. Let us return now to this year’s CERAWeek. The event had more than 3,500 participants (including 30 ministers and officials) from over 70 countries. The conference’s plenary addresses included presentations on a wide range of strategic and investment challenges across the entire energy sector, both globally and regionally. More than 400 leaders from around the world, taking part in over 180 sessions, gathered to gain insight into those challenges and find appropriate solutions. One interesting initiative was the Innovation Agora, showcasing changing business models and featuring new and emerging technologies: from digitization, to blockchain, robotics, energy storage, and mobility, which form the foundation of the future energy landscape.
Which speakers deserved particular attention during CERAWeek 2018? The list of speakers included Chief Executive Officers of global oil companies: Ben van Beurden, CEO of Royal Dutch Shell, Bob Dudley, CEO of BP, Patrick Pouyanne, CEO of Total S.A., and Ryan Lance, Chairman and CEO of ConocoPhilips, as well as CEOs of national oil companies, such as Amin Nasser, President and CEO of Saudi Aramco, or Pedro Parente, CEO of Petrobras. The future of the oil industry was also discussed by heads of international organisations: Mohammad Sanusi Barkindo, Secretary General of OPEC, Fatih Birol, Executive Director of the International Energy Agency, and heads of automotive companies: Mary Barra, Chairman and CEO of GM. Politicians present at the conference included Rick Perry, United States Secretary of Energy, and Sultan Ahmed Al Jaber, CEO of the Abu Dhabi National Oil Company, United Arab Emirates.
What conclusions did the global leaders arrive at? To cut a long story short: confidence in the oil industry is back. Although the memory of falling oil prices is still fresh, they are now a thing of the past. The low price pressures have triggered mechanisms to adapt exploration and production costs to the new price level. As BP’s Bob Dudley said, at USD 66 per barrel the market is better balanced than it was at USD 100 per barrel. As demand grows at a record pace due to low prices, so do investments in the upstream segment, not only in the US, but also in other parts of the world.
However, this is no reason for contentment, as there is a lot of uncertainty. In the short term, the growing shale oil output in the US may decelerate price rises and discourage investment. In the long run, there is uncertainty with respect to demand for oil. None of the major players expects the global demand to decline, but all of them agree that its growth will decelerate. In their opinion, over the next few decades demand is more likely to plateau rather than peak. On the path to stability in oil demand, oil price (real price, in today’s dollars) should grow and then stabilise. In what region? No figures were given, because the price as such is not as important for the oil industry as its relation to the costs of exploration and production, which – thanks to technological progress – are decreasing for a majority of oil fields.
The upstream sector shares the opinion that oil reserves are sufficient to satisfy future demand at a reasonable price in the long term. This, however, will require exploration for and launch of production from new fields (YTF, or yet-to-find fields). The need for new fields is obvious as the existing fields are being depleted at the rate of approximately 2.5–3.0m barrels per day – such volumes must be produced today to keep demand levels unchanged. Although today the oil sector appears to believe that demand is set to plateau, such belief is not shared by the financial sector, which provides funding for upstream projects.
The seed of uncertainty was planted in 2015, when the price of oil fell and it was clear that it would not rebound soon. It was at that time that the end (of growth) of the demand for oil and the prospects of stable low prices were predicted to materialise. The financial sector began to show signs of worry since oil prices serve as the basis for valuation of oil companies and many financial assets. The first concerns were voiced by Mark Carney, the Governor of the Bank of England, who at a meeting of Lloyd’s of London (insurance and reinsurance companies) held on September 29th 2015 in London drew attention to the long-term financial stability risk caused by the impairment of the energy sector’s assets due to climate change. Afterwards, as the Chairman of the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, on December 4th 2015 in Paris, Mark Carney announced that the Task Force on Climate-related Financial Disclosures (TCFD) would be established with Michael R. Bloomberg as its Chair. In June 2017, TCFD issued recommendations on disclosure of exposure to climate-related risks, which are actually becoming reporting standards for companies with revenues in excess of USD 1bn. In December 2017, 230 organisations, including 150 financial institutions with total assets worth more than USD 80 trillion, many large energy companies, governments of European countries, and the London Stock Exchange, adopted the TCFD recommendations. According to the TCFD, the energy sector is exposed to climate risk due to changes in demand for fossil fuels, production and application technologies, emission reductions, and water availability. Therefore, the TCFD recommendations do not encourage investing in exploration and production from new oil fields.
More information about practical implications of this situation for oil and gas companies together with more observations from CERAWeek will be published in the next post.
Adam B. Czyżewski, Ph.D., has been the Chief Economist at PKN ORLEN since 2007. He specialises in the changes of the global energy sector that are driven by economic policies and revolutionary innovations.