The first rule of making projections out to 2040 is to recognize the fact that you'll almost certainly be wrong. After all, think about doing the same thing back in 1992. Would you have predicted this?
Somehow, I doubt it; most people didn't see it coming 24 days ago.
But when you're the International Energy Agency, you have to go out on a limb and peer a quarter-century ahead anyway. The latest World Energy Outlook, published on Tuesday, weighs in at a magisterial 667 pages of detailed analysis and scenarios. I'm going to focus specifically on one aspect: oil supply and demand.
One scenario is called "New Policies" -- essentially taking governments at their word in terms of commitments to limit greenhouse gas emissions. It isn't an all-out decarbonization scenario, nor one where no further political efforts happen. It sits between these two and therefore represents something like a middle way. Here's how oil demand is projected to go under this one:
The first thing to notice is that, in contrast to recent comments from the likes of Royal Dutch Shell Plc's CFO, these numbers don't show a peak in oil demand anytime soon.
The second thing to notice, though, is that 11 million barrels a day extra spread over 25 years equates to average annual growth of 440,000 barrels a year. That's roughly a third of the pace over the past 25 years, when demand increased by roughly 1.1 million barrels a day, on average, each year.
So this wouldn't be a scenario of peak demand, just very slow-growing demand. Now match it up with the IEA's projections for where that oil would come from. In the chart below, the various sources that aren't controlled by OPEC are split into their major types:
Big Oil's best prospects are conventional fields outside of OPEC, which aren't subject to any quotas (such as they are), generally enjoy better fiscal terms, and can be booked easily as reserves. Big Oil also figures prominently in Canada's sandpit. Everything else there -- OPEC, 'Tight oil' such as shale resources, and natural gas liquids -- are generally less lucrative or not an area where the oil majors have displayed a sustained competitive advantage. Add up projected conventional non-OPEC and oil sands supply and it looks like this:
Remember also that a big part of that shrinking pool of oil is in Russia, another tricky jurisdiction. Factor it out and the pool shrinks from 25.4 million barrels a day in 2015 to 20.5 million.
The need to offset natural decline in existing oilfields means that, even under this scenario, the majors would have opportunities to invest. But in order not to be reduced to a residual source of supply and to promise growth to underpin dividends, they would have to cut more deals with OPEC hosts and demonstrate that, despite the record to date, they can out-compete their independent E&P rivals in shale. They would also have to wring as much value as they can from natural-gas liquids -- as well as, of course, natural gas itself.
Funnily enough, Shell, run by a CEO with a long history in liquefied natural gas and petrochemicals, is positioning itself for that world (and maybe one where oil demand peaks sooner). Exxon Mobil Corp. also has a big downstream and chemicals business and has bet big on U.S. shale gas and, although stymied for now, Russia. Chevron Corp., meanwhile, has invested heavily in LNG and talks up its shale oil assets.
These are all valid responses (although gas faces risks of its own from coal and renewable energy). The wider point is that this particular possible world looks much harsher for the majors than the past 25 years -- even with oil demand still projected to go up.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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