Big Oil’s business model – broken?

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Michael T Klare in an article at Grist claims that Big Oil’s business model is broken.

I’m not so sure. An IEA (International Energy Association) update which he cites is titled A business-as-unusual outlook for oil in the medium term. Certainly there have been changes since the IEA’s World Energy Outlook 2014 (see my recent post).

Last September in the Outlook document the IEA saw oil prices rebounding, averaging $82.50 a barrel in 2015 and rising to near $100 in the coming years. Now they see prices recovering gradually to reach $73 a barrel in 2020.

The IEA now sees production as increasing by 5.2 million barrels per day over the same time period, which is substantially the same as forecast last September.

The IEA sees four main factors at play:

  • Emerging economies are reaching a less oil intensive stage of development.
  • The global economy is becoming less fuel intensive.
  • Concerns over climate change are affecting policies, for example the fuel economy regulations for motor vehicles in the US, which Klare says will reduce demand by 2.2 million barrels per day by 20125.
  • Globalisation of the natural gas market and the emergence of renewable technologies has led to inter-fuel competition beyond what would have been expected only a few years ago.

North American unconventional production (light tight oil, or LTO) has been greater than expected and has become the top source of incremental supply. Iraq supply increase is also beyond expectations.

Klare’s major point is that the oil industry assumed that demand would continue unabated no matter what the price, leading to massive investment in what he calls “tight oil” – oil from unconventional, hard to get at sources. His thesis is that production and consumption will increase, but only slowly, and to an extent and at a price that will not justify the investment necessary to extract tight oil.

The investment in tight oil dates from 2005, when production was 85.1 million barrels per day. At that time the IEA forecast that demand would reach 103.2 million barrels per day in 2015. In 2014 it was 92.9 with the forecast for 2015 only 93.2.

On the price recovery from $55 per barrel to $73 in 2020, Klare says:

Such figures fall far below what would be needed to justify continued investment in and exploitation of tough-oil options like Canadian tar sands, Arctic oil, and many shale projects. Indeed, the financial press is now full of reports on stalled or cancelled mega-energy projects. Shell, for example, announced in January that it had abandoned plans for a $6.5 billion petrochemical plant in Qatar, citing “the current economic climate prevailing in the energy industry.” At the same time, Chevron shelved its plan to drill in the Arctic waters of the Beaufort Sea, while Norway’s Statoil turned its back on drilling in Greenland.

In that sense Klare is right. Also profits like $32.6 billion in 2013 for Exxon (second only to Apple) and $21.4 billion for Chevron are unlikely to continue. Nevertheless these firms are not out of business. Some of the smaller producers in the sense of firms and countries may be, leading to possible failed states and security concerns. Russia will be producing less.

The bottom line, though, is that the crystal ball is clouded. Uncertainty prevails.