The End of the Hydrocarbon Industry As We Currently Know It?

In September 2016, I suggested that the hydrocarbon industry was crossing an important threshold (“Is the Oil Industry at the Beginning of the End?", see this blog below this one), based on Oswald Clint’s predictions of oil demand over the next 20 odd years.

Clint alluded to technological changes causing a decline in demand for hydrocarbons.

Tony Seba has provided more insight into what these are and the likely timescales.

I recommend you either get a copy of Seba’s book: Clean Disruption of Energy & Transportation. 2014 (ISBN: 9780692210536), and/or take a look at some of his recent presentations on YouTube, for example:

https://www.youtube.com/watch?v=2b3ttqYDwF0

If you believe Seba; it doesn’t look good for the hydrocarbon industry that we currently know!

Seba predicts that Autonomous Vehicles (AV) will continue to develop and gain regulatory approval around 2021.  In his view, this is the tipping point when the Internal Combustion Engine (ICE) in land vehicles is “doomed” and that from 2021, to approximately 2030, personal transportation will be totally disrupted away from conventional ICE cars to Electric  (EV) & AVs, which will result in a massive decline in the car fleet (to 20% of the current global fleet), with commensurate decline in demand for petrol.

In terms of the oil industry, Seba predicts that, on the assumption that AV’s get regulatory approval in 2021, oil demand will peak at 100 MMBOPD in 2020 then decline to 70 MMBOPD by 2030.

Any production uneconomic at $25/Bbl will be stranded (i.e. non-commercial).

Under current (i.e. 2017) costs, up to 70% of Deepwater, Shale, plus Oil-sands production, would become uneconomic.  Everything out of the US Bakken would become stranded in the next 5 years!

Likewise, refineries and pipelines will become uneconomic such as the proposed one from Canada to the US, which Donald Trump appears to want to reinstate.

Seba’s predictions hinge on the take-off of AVs, EVs and the growth of Transport As A Service (TAAS), whereby people no longer own personal vehicles; they use AVs on-demand.  This business model is what Uber, Google, Tesla and other companies are working towards.

Seba’s predictions tie in reasonably with Clints’, but with the accelerated demise of the oil industry starting in just 4 years’ time!  Seba, in his presentations, likes to show the disruptive effect of the ICE car on the use of horses.  The transition was a matter of 10-15 years and he suggests this duration is quite possible for the demise of the ICE to AVs (plus TAAS).

There will still be demand for oil & gas; however, this will be substantially lower than the estimated peak demand; perhaps dropping to around 20 MMBOPD.  This oil will come from the lowest cost areas, for example, the Middle East and Russia.  The rest of the hydrocarbons; rather like the existing, huge reserves of coal, will be stranded and have no value.

Seba uses a couple of examples of where successful businesses and smart executives have completely misunderstood the evolution of technology and particularly the disruptive elements.

I suggest the majority of independent oil & gas companies currently fall into this category. 

They are predicting demand to continue growing beyond 100 MMBOPD as developing countries’ populations start buying ICE vehicles, etc.  Seba predicts this won’t happen; these countries will jump to AVs / TAAS because it is actually cheaper to do so.

So, beware of investing in an industry that is on the cusp of being disrupted.

Seba predicts the beginning of the end of the hydrocarbon era could be in 2021 and the full contraction (but not complete elimination) by 2030; which is only 13 years away.

Pretty dramatic stuff, but the transition from the horse to the car was a similar scale of disruption.

Aside from the demise of the oil industry, there’s some positives from Seba’s predictions, such as:

·        Substantially reduced numbers of vehicles and therefore pollution.

·        Car manufacturing will contract significantly reducing the requirement for raw materials and energy.

·        Substantially less parking space required, so more commercial / housing benefit from land

·        Seba also predicts that primary energy generation will be disrupted away from the current, inefficient “peaker” central generation systems, to solar plus battery storage (plus other renewables & possibly Nuclear).  This all helps in the de-carbonisation process.

Where are the weaknesses in Seba’s predictions?

·        The main uncertainty is when EVs and AVs cross the exponential-shaped disruption tipping point and take-off.

·        Seba predicts this will be in 2021, plus or minus a few years.

·        He is in no doubt that it will happen; the uncertainty is when the acceleration occurs.

In my earlier musings in 2016, I referred to David MacKay’s excellent review of sustainable energy (Sustainable Energy – Without The Hot Air, 2009-2012  https://www.withouthotair.com ) which summarises how the UK (and other countries) could realistically transition away from carbon-based energy.

MacKay alluded to technology improvement in transport, such as EVs, but the AV and TAAS models didn’t exist, when he wrote his book.

These appear to be game-changers and, once battery and AV technology has matured, together with solar plus storage; the old carbon-based model will be largely disrupted, or to put it another way superseded, or in other words: Dead.

Potentially in the next 10-15 years!

Thoughts?

Response to Linked In Comments 17 September 2016

Most comments to the original post concern non-energy generating uses of oil plus the difficulty of powering marine craft and planes without using hydrocarbons.

General opinion is that the combustion engine used in terrestrial vehicles will be replaced by electric motors with the electricity generated from low or no carbon usage power stations. Electric vehicles are far more energy efficient than conventional combustion engines, see Chapter 20 - Better Transport of David MacKay's excellent treatise, Sustainable Energy-Without the Hot Air ( www.withouthotair.com )

However, the transition away from hydrocarbons is unlikely to be rapid or imminent because:

"We are not on track to a zero carbon future.  Long term investment is not happening.  Carbon sequestration companies are not thriving, even though advice from climate and economic experts is that sucking carbon dioxide from thin air will very probably be necessary to avoid dangerous climate change.  Carbon is not being captured at any coal power stations (except for one tiny proto-type in Germany).

Why not? 

The principal problem is that carbon pollution is not priced correctly. And there is no confidence that it's going to be priced correctly in the future.  By correctly, this means the price of emitting CO2 should be big enough such that every running coal power station has carbon capture technology fitted".

So the demise of hydrocarbon combustion is not imminent, as most of you have concluded.

But, the beginning of the end has started simply because the majority of the World now concludes we cannot continue burning hydrocarbons as we have in the last 100 years.

MacKay illustrates how the UK could replace hydrocarbons  in Chapter 27 (Five Energy Plans for the UK) where the fifth plan appears to be the most realistic comprising a significant baseload of Nuclear power (for the hugely increased electrical demand for vehicles etc) topped up by markedly smaller contributions from tidal, hydroelectric, waste, pumped heat, wood, solar, biofuels and wind.

The technology exists; however, until the huge cost of fossil fuel pollution is properly accounted for, which in effect prices hydrocarbons out of the market, the transition to a low-carbon world will be long and slow.

The transition has started as evidenced by the 2015 Paris Accord; hence the beginning of the end for the fossil fuel era.

Any estimates as to when the tipping point away from hydrocarbons will occur?

This century, or the next?

Is the Oil Industry at the Beginning of the End?

"While some have worried about peak oil (supply) in the past, the reality is that we will run out of demand before we run out of supply". Oswald Clint (Bernstein). September 2016

Full Abstract

Take a read of the Full Abstract using the link above.

As most people are aware the hydrocarbon industry follows a cyclical process driven by the price of a barrel of oil which is a function of supply and demand. The current (apparent) low oil price being a function of too much supply partly with the introduction of significant domestic US production and reduced demand from China. The new supply from unconventional reservoirs was not something forecast 10 years ago, consequently this didn't feature in previous estimates of peak oil supply.

In previous cycles the "global environment" was relatively consistent; however, in 2016 this isn't the case because of the introduction of unconventional hydrocarbons but also because of the growing presence of global warming.

In my opinion the beginning of the end of the oil era has started.

Let me qualify this statement: Assuming the current system of allowing free pollution continues, there will be increasing pressure to not use hydrocarbons for transport and electricity generation. The coal era is currently coming to a close even though there are several hundred years’ worth of coal available to generate electricity.

"Peak (oil) demand is what we should be really worried about. While most long term industry estimates (BP and Exxon), the IEA and OPEC project demand will continue rising indefinitely (to at least 2040) to around 110 MMbbls/d, we project that demand is likely to peak between 2030-35 at around 108 MMbbls/d before entering into long term decline. While population and economic growth will drive demand higher to 2030, the relentless march of fuel efficiency and technology will eventually cause demand to peak before 2035". Oswald Clint (Bernstein). September 2016

The fundamental flaw in this is that the pollution cost from burning fossil fuels isn't free; which everyone should understand and acknowledge. In reality the full, real cost of burning hydrocarbons is huge because of the pollution.

It would appear that the predictions made by Clint don't try to account for the cost of pollution, which is understandable because most Economists & Policy-Makers ignore this crucial element; however, Clint foresees "technological" changes reducing the demand for oil from about 2030 onwards. Whereas (not surprisingly) the oil companies see demand increasing and continuing much further into the future.

With the December 2015 Paris Accord on global warming agreed by 197 countries; this suggests to me that the World now agrees we have a problem due to the burning of fossil fuels.

So, the global context for the current & future oil price cycles is quite different from all previous cycles.

Oil & gas companies are in a finite industry which is now starting to see an end-point that is not that far away. Keep an eye on your investments in these companies!

But if oil & gas companies could offer (environmentally) carbon-neutral hydrocarbons by dealing with the pollution either through upstream or downstream de-carbonization; they would have a much longer timeline available. This would require a global consensus on pricing hydrocarbon pollution, which unfortunately is not likely in the near term.

However, companies like Saudi Aramco could take the lead on de-carbonization, possibly using cheap solar power as input.

It's difficult to see how the large number of small and medium sized oil & gas companies will exist in 25 to 50 years’ time. Indeed, unless all oil & gas companies wake up to the changing world, even the independent super majors will struggle to maintain their current exploration & production business model in the next 25 to 50 years. The oil-rich National Oil Companies will likely live the longest, particularly if they can address de-carbonization. Some companies are actively moving out of hydrocarbons and into renewables, for example DONG and Centrica. Hindsight might show these were the forward thinking companies...

So, 2016 would appear to mark a threshold into a different hydrocarbon world; potentially the beginning of the end of the oil era.

Thoughts?