Under a scenario where fossil fuel use is restricted to limit
global warming to 2°C, oil use would be significantly more
limited. The IEA’s 450 Scenario (consistent with a 50%
probability for less than 2°C global warming) projects global
oil demand to rise slightly to 93.7 million b/d in 2020 but
thereafter fall to 74.1 million b/d by 2040. By comparison,
coal consumption would fall 38% over that period and
natural gas demand would rise 16%.1 According to
Norwegian oil firm Statoil’s 2°C Renewal scenario, and
assuming accelerated clean technology transitions, for
instance, oil use would be about 15% lower than today at
1 International Energy Agency, World Energy Outlook, 2015.
4
below 80 million b/d by 2040 and coal use would drop
precipitously to only 14% of primary world energy demand.
Under the Statoil scenario, natural gas would rise to 24% of
primary energy, up from 21% today.2
A similar scenario study by the University of California,
Davis, suggested that several emerging factors – efficiency
technologies for advanced vehicles, logistics planning and
freight, changes in urban transport patterns that cap
personal vehicle ownership and congestion, and slower
than expected economic growth in key Asian economies –
could bring a temporary peak of oil demand in transport in
the next decade or so. Population growth and expanding
wealth effects, without strong policy interventions, will
eventually overwhelm these improvements, allowing oil
demand in the transport sector to reach 55 to 60 million b/d
by the 2040s, compared to 52 million b/d in 2015. This
outlook contrasts with the IEA Current Policies Scenario of
75 million b/d for transport oil demand by 2040 (based on
today’s policies only) and ExxonMobil’s 2015 base forecast
of about 69 million b/d by 2040.
Shifting Strategies
If industry and markets become more confident in a
peaking, or at least a flattening, of oil demand growth, a
change in investment and production strategies is likely to
emerge, both among private companies and within OPEC
itself. That means even if oil markets tighten in the next
year or two, players will have to think twice about delaying
the development and production of reserves, lest they
disadvantage themselves over the longer term. Only parties
that have no choice (lack of finance, geopolitical barriers,
inability to organize investment due to bureaucratic failures,
etc.) will be left out of the calculation whether to consider
the remaining “carbon budget” for global oil production in
deciding how much, and when, to invest to monetize
existing reserve holdings. Companies will also have to
consider when it no longer makes sense to continue
exploration for new resources in high-cost, long lead-time
environments as countries with large, low-cost reserves
more aggressively pursue a market share-oriented strategy
for their remaining oil and gas assets.
In this possible environment, to continue to attract investors
and capital, the oil and gas industry as a whole must
develop a value proposition that is consistent with its core
production not growing as overall production growth may
not be possible for all players. To deliver bottom-line value
growth with stable top-line production, standardization,
repetition, low-cost solutions and manufacturing processes
will probably play a key role in reducing costs and
increasing margins. This will partly be driven by
consolidation in the industry and partly by competitive
pressures and cooperation between the industry and its
suppliers. This is a fundamental change for an industry
geared towards tailor-made solutions to seek competitive
advantage.
2 See Statoil’s Renewal scenario presented in Energy Perspectives 2015. Click here.
To balance cost challenges against the possible need for
new reserves, a leaner and more efficient industry is
required both in execution and operation. Companies will
need to be prepared to deliver significant volumes of oil and
gas at competitive returns, even if prices remain low and
carbon externalities are priced more accurately. The
industry will undergo a new technical revolution, with
significantly higher levels of artificial intelligence and
automation and remote operation and management. The
new leaner environment will impact the supplier industry,
including local content in host nations, and adversely affect
national revenues achievable from the oil sector.