The enormous economic contribution of the oil and gas
industry to many national economies makes its future of
critical importance to the global community. The purpose of
this paper is to consider the future of the oil and gas
industry and the profound challenges that it is facing.
Although oil and gas are likely to be major sources of
energy for decades to come, policy-makers and the public
worldwide are re-evaluating the central role they play in
modern life. With rising concerns for future demand, climate
change, the cost of project development, governance and
deteriorating community-level relationships, the industry
finds itself in a delicate situation. Only by recognizing the
true scope of these ongoing challenges and addressing
their implications by offering leadership on solutions can the
industry continue to prosper in an increasingly complex
world.
Future Demand Trends
Since the Industrial Revolution, oil and natural gas have
played an instrumental role in economic transformation and
mobility in everyday life for the majority of the world’s
population.
Oil was so fundamental to the development of
modern society in the industrialized world that the 20th
century is often referred to as the Age of Oil. Today, oil and
natural gas play a pivotal role in the current global energy
system. Approximately 31% of primary energy used
globally is met by oil-based fuels while natural gas
represents a further 21% of total world energy supply.
Since the 1980s, many oil-producing countries and oil
companies operated from the assumption that the
industrialized world would progressively use up its easy to
access oil resources and become increasingly dependent
on oil controlled by OPEC (the Organization of Petroleum
Exporting Countries), and in particular the vast reserves of
the Middle East. Under this long-prevailing world view,
which lasted from the 1980s until recently, OPEC’s petropower would increase over time and therefore all the oil
cartel really needed to do was wait it out for that day to
come. Through the 2000s and up until last year, OPEC took
a revenues-oriented strategy, believing that this oilconstrained world had arrived and its oil was more valuable
under the ground than on the market. Oil companies, too,
responded to this world view by pursuing a business model
that maximized adding as many reserves as possible to
balance sheets and warehousing expensive assets
.
The shale boom in the United States and the Paris climate
accords, however, have changed the industry’s outlook for
the future of oil and gas. With the prospect that major
economies like the US, China and Europe will actively try to
shift away from oil at a time when the costs for producing oil
from shale and other kinds of source rock as well as from
conventional sources is declining through technological
innovation, producers are coming to realize that oil under
the ground might someday be less valuable than oil
produced and sold in the coming years. In effect,
perceptions have changed from believing a peak in
supplies was possible to believing a peak in demand for oil
is possible over the next several decades. Some investors
have also become concerned that oil and gas company
shares may be overvalued, if warehoused high-cost oil and
gas assets become stranded.
This dramatic shift in expectations is changing the operating
environment for the future of oil and gas. Moreover, policymakers, investors and scientists gathering in Paris last
December at the UNFCCC COP21 concluded that new
efforts are needed if the planet is to avoid catastrophic
climate change driven by the accumulation of greenhouse
gases in the atmosphere. Under a scenario where fossil fuel
use is restricted to limit global warming to 2°C, oil use may
still be relatively stable, but certainly not expand to the
same extent as in existing business-as-usual expectations.
The World Economic Forum’s Global Agenda Council on
the Future of Oil & Gas considers strategies that can be
deemed to be robust for the oil and gas industry in a future
2°C world towards 2040 as well as most alternative futures.
The council is not advocating or opining on the “realism” or
likelihood of any given scenario,
but considers what would
be a robust strategy either in a business-as-usual outcome
or if a low-demand growth circumstance indeed emerges.
According to the central New Policies Scenario of the
International Energy Agency (IEA), the need for oil and gas
to fuel global economic well-being for an expanding middle
class in the developing world will increase oil and gas
demand significantly over the next three decades, despite
significant improvements in energy efficiency. Given the
natural decline that comes in operating the world’s current
inventory of producing oil and gas fields, industry believes it
can sustain its current business models. In its New Policies
Scenario, the IEA projects that oil demand will rise by 14%
from the 2014 demand of 90.6 million b/d to 103.5 million
b/d by 2040. Overall, the global system will still be
dependent on oil and natural gas for the majority of the
energy required to fuel economic activity, with fossil fuels
generally representing roughly 75% of total primary energy
use in 2040. But this forecast is looking more questionable
in light of changing global economic conditions, technology
innovation and shifting demographic trends
