Oil execs confront ‘forces of change’
Leaders gather for CERAWeek amid uncertainty
Daniel Yergin has spent decades studying and thinking about the oil and gas industry, writing books chronicling an industry that first began with the ancient inhabitants of the Middle East using thick bitumen that oozed from the ground to build walls and roads and waterproof their ships.
But Yergin, author of the Pulitzer Prize-winning “The Prize: The Epic Quest for Oil, Money and Power,” said the years ahead will go down in history as among the most pivotal for energy. Hydraulic fracturing, the surge of renewable energy, the global response to climate change, all have come together at the same time to revolutionize an industry that over the past two centuries has started wars and made and lost fortunes many times over.
“There’s probably never been a time when there’s this many different forces of change buffeting the energy industry,” Yergin said. “It leads to questions of uncertainty about what the energy industry is going to look like in the future.”
These forces and their impact on ever-volatile commodities markets will be front and center as the 36th annual CERAWeek, hosted by the research firm IHS Markit, opens in downtown Houston on Monday. With Yergin, vice chairman of IHS Markit, as master of ceremonies and interviewer-in-chief, the conference has become a see-and-be-seen event for the world’s energy executives — Davos for the oil set, attendees like to joke. This year’s scheduled
speakers include the likes of new Exxon Mobil CEO Darren Woods, Saudi Arabian Energy Minister Khalid A. Al-Falih and recently confirmed Environmental Protection Agency chief Scott Pruitt.
But despite the state of change in the industry, it’s unlikely to dampen the atmosphere of an event that has long served as something of a celebration of the oil and gas industry — not to mention an opportunity for executives and oil ministers to make contacts for future deals.
“We still see a world of opportunity,” said Marty Durbin, executive director for market development at the American Petroleum Institute. “The pace of change on the energy side has happened so quickly in relative terms — just 10 years — we’ve really just begun to understand how much opportunity there is.”
This year, at the top of the ticket, as almost always, is the state of the world’s oil market. Since the Organization of Petroleum Exporting Countries announced a production cut three months ago, crude prices have climbed above $53 a barrel — up more than 60 percent from a year ago.
‘Not a flash in the pan’
With drilling rebounding in West Texas and other shale fields across the United States, the question is how long will prices stay up, as U.S. production offsets cuts of 1.8 million barrels a day by OPEC, Russia and other major producers. IHS Markit projects that U.S. output will grow by more then 500,000 barrels a day this year.
OPEC “understands this is not a flash in the pan
anymore,” Yergin said. “This is a major new supply source, and it’s still in its early phase.”
Out in West Texas, the go-go spirit earlier in the decade is already returning, with investors again pouring money into shale companies that are producing oil and gas at a fraction of the cost they did before the downturn, said Larry Oldham, a financier in Midland. Oil companies also are investing heavily to acquire land and drilling rights in the Permian Basin, pouring $16 billion into the prolific oil field since the beginning of they year, according to IHS Markit.
“The economics at $50 oil are staggering,” he said. “The traffic around the loop in Midland, it’s not Dallas or Forth Worth, but it seems like it to me. And where you had service companies out of business, now they’re back in business and the biggest issue is finding people.”
How OPEC will respond to that supply increase will be one of the big questions for Al-Falih, along with OPEC Secretary General Mohammad Sanusi Barkindo and Russian Energy Minister Alexander Novak, when he sits down with Yergin at CERAWeek.
Trump effect
Another big question: What will Donald Trump’s presidency mean for the energy sector? Trump has promised to boost U.S. fossil fuel production and build out pipelines but at the same time threatened to raise tariffs on U.S. imports, setting up a potential trade war that has many in the industry nervous, Yergin said. Mexico, a particular target of Trump, could become a large market for Texas and U.S. oil, gas and refiners as Mexico liberalizes its energy markets.
“There’s things (about Trump) seen as very positive,” Yergin said. “But there’s uncertainty about how the tax code will change. And we have a very integrated North American energy market, which has become more so with the growing gas exports to Mexico. So there will be a lot of questions about how the trading system is going to change.”
Longer term, the conversation is likely to focus on energy companies adapting to the shift by world governments to combat climate change, enabled by a technology boom in renewables and advances in transportation that threaten to fundamentally change how the energy business operates.
With a climate change skeptic in the White House, the future of these policies has become uncertain, but Yergin said the feeling is the world is still heading toward a low-carbon economy.
One CERAWeek attendee, Torgrim Reitan, executive vice president of U.S. development and production at Norwegian oil com- pany Statoil, agreed. He said he expects plenty of discussion around the dinner tables at CERAWeek about climate change, in particular a proposal by former secretary of state and oil industry attorney James Baker to create a carbon tax.
“More and more companies are joining forces behind this,” Reitan said. “We see a very constructive debate around this and that discussion is gaining force.”
Peak demand
One topic getting more time at CERAWeek this year than it has in the past is transportation, which, with the development of increasingly more fuel-efficient vehicles, as well as electric ones, threatens to upset the oil industry’s largest source of demand, Yergin said.
Oil companies and analysts predict that oil demand could peak anywhere from the next decade to the mid-century; Yergin said that debate of peak demand shows how much the industry has changed.
“A decade ago,” he said, “it was peak supply.”