CORPORATE LEADERS RAISE ALARM BELLS ON PROTECTIONISM AND ENERGY SUPPLY CONCERNS
HOUSTON CERAWeek by IHS Markit has energy as its central focus, but the breadth of participants always brings broader, thoughtprovoking perspectives.
This year’s conference is no exception.
Macro level discussions Monday and Tuesday offered delegates new information about energy supply and demand, the rapid developments and applications of technology in the energy space, the changing nature of the workforce and the importance of carbon pricing.
And there was no getting away from the impact of a potential trade war stemming from the threat of tariffs being slapped on Canada’s steel and aluminum exports to the United States, or the implications of renegotiating the North American Free Trade Agreement.
It appears — from some of the commentary here — a short-term mindset, whether in government with NAFTA and tariffs, or with business and its obsession with quarterly numbers is failing to create long-term value.
An early illustration of this in the energy space was Monday’s supply and demand outlook from the International Energy Agency, which highlighted how the lack of long-term investment has led to a shortage of oil and natural gas supply.
Saudi Aramco CEO Amin Nasser quantified the numbers for delegates Tuesday, saying the drop in investment since the downturn was $1 trillion and that the world would need to see a further $20 trillion in energyrelated investment over the next 25 years to meet future demand.
Some might say his remarks were self-serving, given Saudi Arabia’s dependence on oil production and the fact his company is proceeding with an initial public offering. But the numbers add up.
While growth in the developed world is slowing, the opposite remains true in developing regions.
Discussions often centre on China and its rising middle class that aspires to a western lifestyle characterized by mobility. But on a global scale, an additional 5 billion people are expected to meet that ‘middle-class’ definition by 2030, which means rising demand for all energy molecules, including renewables.
But the industry as a whole — with few exceptions — has been consumed with short-term survival.
While some of this could be tied to the impact of climate policy and the fear capital or resources could be stranded, as BP chief executive Bob Dudley said, there is no silver bullet to decrease emissions.
“If there was a worldwide ban on the sale of traditional combustion cars ... oil demand would still be higher in 20 years than it is today,” he said. “Emissions would still go up by seven per cent by 2040.”
Or, as Saudi Aramco’s Nasser implied, switching to electric vehicles charged with coal-fired power essentially means the tailpipe emissions have been traded for smokestack emissions.
In simple terms, a lack of oilrelated investment, coupled with growing demand, is setting the stage for another price spike. According to the IEA’s analysis, energy-related investment is expected to increase by only six per cent this year.
“If the investments don’t come, we may well see serious challenges starting from the 2020s, despite the growth coming from the United States,” said IEA executive director Fatih Birol. “It does not add up.
“… Therefore, if there is no miracle, we just need investments to come up in new upstream projects.”
Not only that, the investments need to be in projects with longterm time horizons.
Call it the battle of the shale versus the long cycle oilsands, deep water or liquefied natural gas opportunities, but the relative short-termism in the energy space is no different than in the broader corporate landscape.
That short-term thinking, which consulting firm McKinsey & Co. has quantified, has cost U.S. companies US$1 trillion in market value between 2001 and 2014.
And the uncertainty currently being wrought in the White House — whether on trade or tariffs — will not encourage companies to risk capital for the long term.
Where energy companies have stayed away from long-term oil investments — the same has been true with liquefied natural gas.
If there is to be a serious impact on emissions, suggested Dudley, turn to the power sector and the decrease in emissions that has occurred in the U.S. with natural gas replacing coal in power generation.
Contrary to what many believe, the LNG surplus that has prevented companies from committing long-term capital will not last as long as many believed. Projections at CERAWeek showed the LNG surplus dissipating by 2020.
The simple math on the length of time it takes to design, build and commission these projects — much longer than two years — suggest the market for LNG is setting up to be much stronger than expected. And that goes back to the growth in demand for energy molecules in the developing world.
CERAWeek each year provides an important benchmark for the global energy sector. And while there was greater optimism relative to last year about the supply and demand balance for oil and the potential of natural gas to decrease global carbon emissions, the biggest shift in the last 12 months has undoubtedly been with respect to technology.
Never before had there been the kinds of dialogue about the role of data, analytics, the internet of Things, artificial intelligence or machine learning, and its importance to the long-term sustainability of the energy sector.
Throughout the history of the energy sector, new technology has acted as a catalyst to investment. Judging from what’s developing at an exponential rate today, it’s again poised to do just that.