CERAWeek happy talk is cover for oil industry’s doubts
How the world will generate and consume energy in the future has never been more in doubt.
Fossil fuels face growing competition from a wider variety of sources, and companies have never found it more difficult to predict costs, prices and regulations. And where there is uncertainty, volatility always follows.
While the U.S. will flood the world with crude oil for the next few years, effectively capping prices, the quandary for international oil companies is what will happen after 2020. Fatih Birol, executive director of the International Energy Agency, is worried that oil producers will fail to meet new demand.
‘We believe more upstream investments are needed to avoid major challenges in the 2020s as the demand is growing stronger,” Birol said at a news conference during the annual energy conference CERAWeek by IHS Markit.
The problem for oil executives is predicting future demand, with expert forecasts varying widely depending on an analyst’s faith in new technology, expectation of stricter greenhouse gas limits and future consumer preferences.
There is also a psychological element involved in the industry’s boom and bust cycles. Energy companies are herd animals, wary of making the first move and prone to stampeding when one of them does.
The theme for this year’s $8,250 a ticket CERAWeek is “Energy in Transition.” It’s an appropriate theme for an industry that is losing its monopoly on transportation fuels and considered an environmental villain by many of its customers.
The world’s wealthiest countries simply don’t need or want as much energy. Populations are stabilizing or shrinking, and consumers are trying to use energy more efficiently.
The riddle that no one can solve, though, is what will happen in China and India, the sources of at least half of future oil demand growth. How serious is China’s commitment to electric vehicles, really? Will
India actually become the world’s largest oil importer or seek alternatives?
“The decisions taken in China will be very important. When China changes, everything changes,” Birol said in acknowledging the limitations of the IEA’s forecast.
Deep-water wells, Canadian oil sands and Arctic drilling offer cautionary tales. When many of these projects were funded, forecasters thought $100-a-barrel oil was the new norm. On this same stage in 2014, Chevron CEO John Watson said even higher prices were needed to inspire investment.
"For a company like mine and many others, $100 a barrel is becoming the new $20 in our business," he said in predicting much higher prices.
He could not have been more wrong. Shale oil flooded the market, prices dropped to $26 a barrel, and no one is expecting $100 oil for at least a decade. Major investments in high-cost oil projects turned out to be huge mistakes that cost companies billions.
This year, executives at CERAWeek touted their small alternative energy programs, reiterated their commitment to environmental stewardship and promised to reduce emissions to fight climate change. Make no mistake, though, the conference remained a celebration of the future of fossil fuels.
A common theme was the need to invest in short-cycle projects that cost millions, not billions, and react quickly to volatile prices. Onshore wells and ultra-efficient offshore wells are seen as the future of the industry.
Speakers also celebrated the new U.S. tax code for offering major subsidies to carbon capture and sequestration projects. The industry believes capturing carbon is key to keeping the world burning fossil fuels.
Which leads to the fundamental problem with the IEA’s forecast for fossil fuel consumption, and the other bullish forecasts for oil demand. If the IEA is correct, the world will miss the Paris Accord’s goal of limiting global warming to 2 degrees Celsius, and the planet will heat up 2.7 degrees, with catastrophic results.
“The problem is not energy, it is emissions,” Birol said. “And we need to make energy without emissions.”
CERAWeek is best understood as the annual opportunity for CEOs to talk up their companies and answer softball questions from obsequious consultants. And since their stock prices are largely based on future oil and gas demand, it’s a small miracle no one was gored by the stampede of oil bulls across the stage.
There were a few moments of honesty, though, such as Total CEO Patrick Pouyanne’s praise for the usefulness of his electric car in navigating the suburbs of Paris.
CERAWeek’s stage show should not be considered as anything but cheerleading. Birol’s concern about the industry’s lack of investment in new, large and long-range projects reveals the true mood of deep uncertainty felt behind the scenes.
With competing technologies getting cheaper every year, the oil industry’s true transition is toward cost containment so that it can retain market share. Because if prices go too high, the alternatives will become more attractive, and the next oil boom will be the last.