Big Picture Report: Where is the Worldwide Oil Industry Going Over the Next Few Decades?
July 12, 2024 Article by Jeffrey PriceThe Economist issued one of its impressive surveys recently focused on this topic (see article here). As usual, there was a lot to take in, and very little of it was down-in-the-weeds reporting on today’s immediate issue as it was a discourse on major trends among producers and users. We don’t necessarily subscribe to the author’s positions, but every one is thought-provoking and worthy of serious consideration. Let’s take a look:
First, the major producers in the Middle East know that they need to transition their societies into a post-oil scenario. They are well aware of the impacts of global warming, including sea level rise which has implications for their citizens. Given the peculiar social pact between the ruling House of Saud and the 37 million citizens of Saudia Arabia, Saudi leadership well knows that it needs to transition its citizens into productive jobs in sustainable industries. That being said, getting from here to there is most definitely a major challenge.
Second, given the cost-efficiency of lifting oil that the Middle Eastern countries have, it will be the last man standing. But, third, the European majors (e.g., BPX, Shell) learned a lesson over the last 10-20 years that transitioning into green energy projects does not generate an ROI comparable to projects in their core competency of fossil fuel development and production. Thus, they’ve retreated back to what they do best.
Fourth, in that regard, as discussed in the May 24th edition of the Wall Street Journal (see article here), the Norwegian Sovereign Wealth Fund has reversed course and is voting against a nominated director for the Exxon board who is overzealous in his support of curbing emissions. This position is an example of the pendulum swinging against the green initiatives that effectively puts the shareholders of the company into a penalty box if the company is forced to invest in pursuits that don’t measure up to the minimum acceptable profit thresholds.
Fifth, cutting-edge U.S.-based companies, such as Occidental Petroleum, may be onto something by focusing on developing and commercializing technologies in carbon capture. Oxy is differentiating itself as a leader in this critical area. If it achieves a breakthrough, it will be a game-changer for the role of fossil fuels in the second half of this century.
Sixth, there will always be uses for petroleum-based products for specialized transportation (e.g., aviation), plastics, chemicals, fertilizer, etc. But, interestingly, The Economist asserts that there has been a delicate balance between day-to-day consumption and production – they incorrectly call it “demand and supply” – but recently, we can see something that may be a new trend or is it just an aberration. We’re talking about OPEC’s weakening influence on the worldwide market which has translated into a need to find ways to cut daily production by an estimated 1.5MM bbls per day below the rated capacity of the members of the cartel as discussed in a June 1st New York Times article. The Saudis are making major adjustments in their CapEx to postpone expanding their own daily production capacities because it has become clear to them that demand is not sufficient to absorb that additional level of oil at an acceptable price. Therefore, to preserve today’s worldwide price points (e.g., Brent in the $70s and low $80s), Saudi Arabia has curtailed its own production and certainly has no intention of pointlessly expanding capacity. This is quite a shift from the conditions that existed a dozen years ago prior to the American shale revolution.
In fact, seventh, the U.S. shale industry has become the global swing producer. U.S.-based producers can and do push up prices or push them down by adjusting their own drilling budgets. Indeed, it is not escaping notice that the rig count in the U.S. is now down by 10% from a year ago. Yet, U.S. production is still creeping upwards. That’s because productivity in the industry simply keeps improving. The Economist points out that the amount of reserves generated per unit of drilling budget is double what it was two years ago. The Economist points out that back then, the oil & gas industry was the worst performer among all the significant sectors in the stock market, but today, it is among the best performers as discipline in its CapEx decisions has become the mantra of the C-suite.
We at First Keystone see this phenomenon ourselves because companies joining our growing community recently who are looking for industrial buildings for lease in Pecos are taking much longer views of their business than they were as recently as early 2022. Back then, a three-year lease seemed like a stretch, but nowadays, the debate is 3 or 5 or just simply buying the facility. This change in thinking comes about when there is rational capital budgeting.
There is lots more in these three articles to absorb when one tries to get their arms around the long-term viability of this industry. Your questions and comments are invited!
The opinions expressed above reflect only those of the author and do not represent those of the First Keystone Pecos Industrial Park organization. First Keystone welcomes responsible fact-based discourses on these topics.